UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q/A
 
 [X]
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
quarterly period ended September 30,
2007
 
 OR
 
 [  ]
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
transition period from ____________ to_____________
 
 Commission
File number 0 - 24012
 
 KODIAK ENERGY
INC.
 (Exact
name of registrant as specified in its charter)
 
 
 Delaware
              65-0967706(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)
 
 
 734 7th Avenue S.W. Calgary,
AB T2P 3P8
 (Address
of principal executive offices - Zip code)
 
 (403)
262-8044
 (Registrant's
telephone number, including area code)
 
 Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15 (d) of the Securities Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
 
 Yes 
X
     No
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 
 Yes 

     No  X
 
 APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE
YEARS:
 
 Check
whether the registrant filed all documents and reports required to be filed by
Sections 12, 13 or 15(d) of the Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
 
 Yes 
X
     No
 
 APPLICABLE
ONLY TO CORPORATE ISSUERS
 
 State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: 106,692,498 Common Shares
 
 Transitional
Small Business Disclosure Format (Check one):  Yes  
     No X
 
 EXPLANATORY
NOTES
 
 This
amendment on Form 10-QSB/A to our Quarterly Report on Form 10-QSB for the fiscal
quarter ended September 30, 2007, originally filed with the United States
Securities and Exchange Commission (SEC) on November 14, 2007, is being filed
for the purpose of restating our unaudited consolidated balance sheet as at
September 30, 2007 and unaudited consolidated statements of stockholders’ equity
and comprehensive loss and related disclosures for the fiscal quarter ended
September 30, 2007 and the cumulative period from inception April 7, 2004 to
September 30, 2007. The restatements are to correct an error in accounting and
an error in applying accounting principles for shares issued during the quarter.
The changes to correct the errors are reflected in the following sections noted
below:
 
 -
              September
      30, 2007 Consolidated Financial Statements and
  Notes
 -
              Management
      Discussion and Analysis
 -
              Controls
      and Procedures
  
  KODIAK
ENERGY INC.
 INDEX
  PART
      I.  FINANCIAL INFORMATION
                        3ITEM
      1.
                        FINANCIAL
      STATEMENTS
                        3Consolidated
      Balance Sheets as of September 30, 2007 (unaudited) and December 31,
      2006
                        3Consolidated
      Statement of Shareholders’ Equity (unaudited) for the nine months ended
      September 30, 2007
                        4Consolidated
      Statements of Operations (unaudited)for the nine months ended September
      30, 2007 and 2006
                        4Consolidated
      Statements of Cash Flows (unaudited) for the nine months ended September
      30, 2007 and 2006
                        5Notes
      to Consolidated Financial Statements
                        6ITEM 2.
                        MANAGEMENT'S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
                        19ITEM 3.
                        CONTROLS
      AND PROCEDURES
                        22PART
      II. OTHER INFORMATION
                        23ITEM
      1.
                        LEGAL
      PROCEEDINGS
                        23ITEM 2.
                        CHANGES
      IN SECURITIES AND USE OF PROCEEDS
                        23ITEM 3.
                        DEFAULTS
      UPON SENIOR SECURITIES
                        23ITEM
      4.
                        SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                        23ITEM
      5.
                        OTHER
      INFORMATION
                        23ITEM 6.
                        EXHIBITS
      AND REPORTS ON FORM 8-K
                        24
 
 2
  PART I. FINANCIAL INFORMATION
 
 ITEM
1.  FINANCIAL STATEMENTS
 
 KODIAK
ENERGY, INC.
 Consolidated
Balance Sheets
 (Exploration
Stage Company Going Concern Uncertainty – Note 1)
 September
      30 2007
                                                                                                                                    (Unaudited)
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  December
      31 2006
                                                                                                                                    (Audited)(Restated
      – Note 2)AssetsCurrent
      Assets:Cash
      and Short Term Deposits
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  7,413,387
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  448,346Accounts
      Receivable (Note 4)
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,310,049
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  685,975Prepaid
      Expenses and Deposits (Note 5)
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  73,993
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  196,8388,797,429
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,331,159Other
      Assets (Note 6)
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  116,820
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  49,860Capital
      Assets (Note 7):Unproved
      Oil & Gas Properties Excluded From Amortization – Based On Full Cost
      Accounting
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  25,996,312
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,270,253Furniture
      and Fixtures
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  79,024
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  55,80326,075,336
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,326,056$
                                                                                                                                  34,989,585
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  2,707,075Liabilities
      and Shareholders' EquityCurrent
      Liabilities:Accounts
      Payable
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,363,251
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  585,253Accrued
      Liabilities
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  409,500
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  273,850Notes
      Payable (Note 8)
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  732,500
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -Premium
      on Flow-through Common Shares Issued (Note 10)
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  933,335
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -3,438,586
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  859,103Asset
      Retirement Obligations (Note 9)
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  108,811
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  90,911Commitments
      and Contingencies (Note 14)
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  3,547,397
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  950,014Shareholders'
      EquityShare
      Capital (Note 10):Authorized:300,000,000
      (2006 - 100,000,000) Common Shares Par Value .001 Each Issued &
      Outstanding 104,907,498 (2006 – 89,946,468) Common Shares
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  104,907
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  89,946Shares
      Issuable (Note 10)
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  538,328Additional
      Paid in Capital
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  37,400,261
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  5,212,777Other
      Comprehensive Loss
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (212,165
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (20,214
                                                                                                                                  )Deficit
      Accumulated During The Exploration Stage
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (5,850,815
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (4,063,776
                                                                                                                                  )31,442,188
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,757,061$
                                                                                                                                  34,989,585
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  2,707,075
  (See
accompanying notes to the consolidated financial statements)
 3
 
 KODIAK
ENERGY, INC.
 Unaudited
Consolidated Statements of Shareholders’ Equity
 For
the Nine Months Ended September 30, 2007
 (Exploration
Stage Company Going Concern Uncertainty – Note 1)
  Number
      of
                          Common
      Shares
                        
                        
                        Amount
                        
                        
                        Additional
                          Paid
      in Capital
                          (Restated
      – Note 2)
                        
                        
                        Deficit
                          Accumulated
                          During
      the
                          Development
                          Stage
                        
                        
                        Accumulated
                          Other
                          Comprehensive
                          Loss
                        
                        
                        Shares
                          Issuable
                        
                        
                        Total
                          Shareholder’s
                          Equity
                          (Restated
      – Note 2)Balance
      at Dec. 31, 2006
                        
                        89,946,468
                        
                        
                        $
                        89,946
                        
                        
                        $
                        5,212,777
                        
                        
                        $
                        (4,063,776
                        )
                        
                        $
                        (20,214
                        )
                        
                        $
                        538,328
                        
                        
                        1,757,061Net
      loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,787,039
                        )
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        (1,787,039
                        )Foreign
      currency translation
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (191,951
                        )
                        
                        
                        
                        
                        
                        
                        (191,951
                        )Total
      comprehensive loss
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (1,787,039
                        )
                        
                        
                        (191,951
                        )
                        
                        
                        
                        
                        
                        
                        (1,978,990
                        )Issuance
      of common stock
                        
                        
                        14,961,030
                        
                        
                        
                        14,961
                        
                        
                        
                        31,718,162
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (538,328
                        )
                        
                        
                        31,194,795Stock-based
      compensation
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        469,322
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        469,322Balance
      at Sept. 30, 2007
                        
                        
                        104,907,498
                        
                        
                        $
                        104,907
                        
                        
                        $
                        37,400,261
                        
                        
                        $
                        (5,850,815
                        )
                        
                        $
                        (212,165
                        )
                        
                        
                        -
                        
                        
                        $
                        31,442,188
  (See
accompanying notes to the consolidated financial statements)
  
 KODIAK
ENERGY, INC.
 Unaudited
Consolidated Statements of Operations
 (Exploration
Stage Company Going Concern Uncertainty – Note 1)
 
 Three
                                                                                    Months
                                                                                    Ended
                                                                                    September
      30,
                                                                                    2007
                                                                                  
                                                                                  
                                                                                  Three
                                                                                    Months
                                                                                    Ended
                                                                                    September
      30,
                                                                                    2006
                                                                                  
                                                                                  
                                                                                  Nine
                                                                                    Months
                                                                                    Ended
                                                                                    September
      30,
                                                                                    2007
                                                                                  
                                                                                  
                                                                                  Nine
                                                                                    Months
                                                                                    Ended
                                                                                    September
      30,
                                                                                    2006
                                                                                  
                                                                                  
                                                                                  Cumulative
                                                                                    SinceInception
                                                                                    Apr.
      7, 2004 to
                                                                                    September
      30,
                                                                                    2007INCOME
      DURING THE EVALUATION PERIOD
                                                                                  
                                                                                  $
                                                                                  (202
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  10,331
                                                                                  
                                                                                  
                                                                                  $
                                                                                  225
                                                                                  
                                                                                  
                                                                                  $
                                                                                  10,331
                                                                                  
                                                                                  
                                                                                  $
                                                                                  27,359EXPENSESOperating
                                                                                  
                                                                                  
                                                                                  549
                                                                                  
                                                                                  
                                                                                  
                                                                                  5,010
                                                                                  
                                                                                  
                                                                                  
                                                                                  12,149
                                                                                  
                                                                                  
                                                                                  
                                                                                  5,010
                                                                                  
                                                                                  
                                                                                  
                                                                                  25,721General
      and Administrative
                                                                                  
                                                                                  
                                                                                  603,697
                                                                                  
                                                                                  
                                                                                  
                                                                                  266,867
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,178,603
                                                                                  
                                                                                  
                                                                                  
                                                                                  700,910
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,510,779Stock-based
      Investor Relations Expense
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  337,500
                                                                                  
                                                                                  
                                                                                  
                                                                                  337,500Stock-based
      Compensation
                                                                                  
                                                                                  
                                                                                  190,239
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  469,322
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  538,491Depletion,
      Depreciation and Accretion including Ceiling Test Impairment
      Write-downs
                                                                                  
                                                                                  
                                                                                  12,900
                                                                                  
                                                                                  
                                                                                  
                                                                                  446,337
                                                                                  
                                                                                  
                                                                                  
                                                                                  35,043
                                                                                  
                                                                                  
                                                                                  
                                                                                  451,485
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,543,299Interest
      Expense
                                                                                  
                                                                                  
                                                                                  75,238
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  94,056
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  902,867882,623
                                                                                  
                                                                                  
                                                                                  
                                                                                  718,224
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,789,173
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,494,905
                                                                                  
                                                                                  
                                                                                  
                                                                                  5,858,657Loss
      Before Other Expenses
                                                                                  
                                                                                  
                                                                                  (882,825
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (707,893
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (1,788,948
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (1,484,574
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (5,831,298
                                                                                  )Other
      Expenses (Income)Loss
      from valuation adjustment
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  25,000Interest
      Income
                                                                                  
                                                                                  
                                                                                  (1,400
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (1,909
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (5,483
                                                                                  )(1,400
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (1,909
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  19,517Loss
      before income taxes
                                                                                  
                                                                                  
                                                                                  (881,425
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (707,893
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (1,787,039
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (1,484,574
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (5,850,815
                                                                                  )Recovery
      of Deferred Income Taxes
                                                                                  
                                                                                  
                                                                                  (55,480)
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -NET
      LOSS
                                                                                  
                                                                                  $
                                                                                  (825,945
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  (707,893
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  (1,787,039
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  (1,484,574
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  (5,850,815
                                                                                  )Basic
      and diluted Loss per share (Note 13)
                                                                                  
                                                                                  $
                                                                                  (.01
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  (.01
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  (.02
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  (.02
                                                                                  )
  (See
accompanying notes to the consolidated financial statements)
  4
 
 KODIAK
ENERGY, INC.
 Unaudited
Consolidated Statements of Cash Flows
 (Exploration
Stage Company Going Concern Uncertainty – Note 1)
 
 Three
      Months
                                                                              Ended
                                                                              September 30,
                                                                              2007
                                                                            
                                                                            
                                                                            Three
      Months
                                                                              Ended
                                                                              September
      30,
                                                                              2006
                                                                            
                                                                            
                                                                            Nine
      Months
                                                                              Ended
                                                                              September
      30,
                                                                              2007
                                                                            
                                                                            
                                                                            Nine
      Months
                                                                              Ended
                                                                              September
      30,
                                                                              2006
                                                                            
                                                                            
                                                                            Cumulative
                                                                              Since
      Inception
                                                                              April
      7, 2004 to
                                                                              September
      30,
                                                                              2007OPERATING
      ACTIVITIESNET
      LOSS
                                                                            
                                                                            $
                                                                            (825,945
                                                                            )
                                                                            
                                                                            $
                                                                            (707,893
                                                                            )
                                                                            
                                                                            $
                                                                            (1,787,039
                                                                            )
                                                                            
                                                                            $
                                                                            (1,484,574
                                                                            )
                                                                            
                                                                            $
                                                                            (5,850,815
                                                                            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depletion,
      Depreciation and Accretion
                                                                            
                                                                            
                                                                            12,900
                                                                            
                                                                            
                                                                            
                                                                            446,337
                                                                            
                                                                            
                                                                            
                                                                            35,043
                                                                            
                                                                            
                                                                            
                                                                            451,485
                                                                            
                                                                            
                                                                            
                                                                            1,543,299Interest
      Expense
                                                                            
                                                                            
                                                                            (18,818
                                                                            )
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            808,811Stock-Based
      Investor Relations Expense
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            337,500
                                                                            
                                                                            
                                                                            
                                                                            337,500Stock-Based
      Compensation
                                                                            
                                                                            
                                                                            190,239
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            469,322
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            538,491Provision
      for Deferred Income Taxes
                                                                            
                                                                            
                                                                            (55,480
                                                                            )
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -Contributions
      to Capital
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            900Changes
      in Non-Cash Working Capital (Note 18)
                                                                            
                                                                            
                                                                            (15,335
                                                                            )
                                                                            
                                                                            
                                                                            (293,614
                                                                            )
                                                                            
                                                                            
                                                                            (94,523
                                                                            )
                                                                            
                                                                            
                                                                            (289,314
                                                                            )
                                                                            
                                                                            
                                                                            36,255Net
      Cash Used In Operating Activities
                                                                            
                                                                            
                                                                            (712,439
                                                                            )
                                                                            
                                                                            
                                                                            (555,170
                                                                            )
                                                                            
                                                                            
                                                                            (1,377,197
                                                                            )
                                                                            
                                                                            
                                                                            (984,903
                                                                            )
                                                                            
                                                                            
                                                                            (2,585,559
                                                                            )Investment
      Activities:Additions
      To Capital Assets
                                                                            
                                                                            
                                                                            (2,176,090
                                                                            )
                                                                            
                                                                            
                                                                            (1,011,208
                                                                            )
                                                                            
                                                                            
                                                                            (7,071,453
                                                                            )
                                                                            
                                                                            
                                                                            (1,852,370
                                                                            )
                                                                            
                                                                            
                                                                            (9,922,900
                                                                            )Additions
      To Other Assets
                                                                            
                                                                            
                                                                            (61,740
                                                                            )
                                                                            
                                                                            
                                                                            (305
                                                                            )
                                                                            
                                                                            
                                                                            (66,960
                                                                            )
                                                                            
                                                                            
                                                                            (405
                                                                            )
                                                                            
                                                                            
                                                                            (116,820
                                                                            )Net
      Cash Used In Investment Activities
                                                                            
                                                                            
                                                                            (2,237,830
                                                                            )
                                                                            
                                                                            
                                                                            (1,011,513
                                                                            )
                                                                            
                                                                            
                                                                            (7,138,413
                                                                            )
                                                                            
                                                                            
                                                                            (1,852,775
                                                                            )
                                                                            
                                                                            
                                                                            (10,039,720
                                                                            )Financing
      Activities:Shares
      Issued and Issuable
                                                                            
                                                                            
                                                                            8,926,576
                                                                            
                                                                            
                                                                            
                                                                            90,000
                                                                            
                                                                            
                                                                            
                                                                            12,372,602
                                                                            
                                                                            
                                                                            
                                                                            3,133,941
                                                                            
                                                                            
                                                                            
                                                                            16,950,832Proceeds
      of Notes Payable
                                                                            
                                                                            
                                                                            300,000
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            3,300,000
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            3,300,000Net
      Cash Provided By Financing Activities
                                                                            
                                                                            
                                                                            9,226,576
                                                                            
                                                                            
                                                                            
                                                                            90,000
                                                                            
                                                                            
                                                                            
                                                                            15,672,602
                                                                            
                                                                            
                                                                            
                                                                            3,133,941
                                                                            
                                                                            
                                                                            
                                                                            20,250,832Foreign
      Currency Translation
                                                                            
                                                                            
                                                                            (126,358)
                                                                            
                                                                            
                                                                            
                                                                            (3,825
                                                                            )
                                                                            
                                                                            
                                                                            (191,951
                                                                            )
                                                                            
                                                                            
                                                                            (733
                                                                            )
                                                                            
                                                                            
                                                                            (212,165
                                                                            )Net
      Cash Increase (Decrease)
                                                                            
                                                                            
                                                                            6,149,949
                                                                            
                                                                            
                                                                            
                                                                            (1,480,507
                                                                            )
                                                                            
                                                                            
                                                                            6,965,041
                                                                            
                                                                            
                                                                            
                                                                            291,530
                                                                            
                                                                            
                                                                            
                                                                            7,413,387Cash
      beginning of period
                                                                            
                                                                            
                                                                            1,263,438
                                                                            
                                                                            
                                                                            
                                                                            1,962,688
                                                                            
                                                                            
                                                                            
                                                                            448,346
                                                                            
                                                                            
                                                                            
                                                                            190,651
                                                                            
                                                                            
                                                                            
                                                                            -Cash
      end of period
                                                                            
                                                                            $
                                                                            7,413,387
                                                                            
                                                                            
                                                                            $
                                                                            482,181
                                                                            
                                                                            
                                                                            $
                                                                            7,413,387
                                                                            
                                                                            
                                                                            $
                                                                            482,181
                                                                            
                                                                            
                                                                            $
                                                                            7,413,387
  (See
accompanying notes to the consolidated financial statements)
  5
 
 KODIAK
ENERGY, INC.
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 For the
Nine Months Ended September 30, 2007 and 2006
 Stated in
US dollars
 
 
 1.   ORGANIZATION,
BASIS OF PRESENTATION AND GOING CONCERN UNCERTAINTY
 
 The
accompanying consolidated financial statements include the accounts of Kodiak
Energy Inc. and subsidiaries (collectively “Kodiak”, the “Company”, “we”, “us”
or “our”) as at September 30, 2007  and December 31, 2006 and for the
three and nine months ended September 30, 2007 and 2006 and for the cumulative
period from April 7, 2004 (inception)until September 30, 2007, and are presented
in accordance with generally accepted accounting principles in the United States
of America (“U. S. GAAP”).
 
 The
Company was incorporated under the laws of the state of Delaware on December 15,
1999 under the name “Island Critical Care, Corp.” with authorized common stock
of 50,000,000 shares with a par value of $0.001. On December 30, 2004 the name
was changed to “Kodiak Energy, Inc.” and the authorized common stock was
increased to 100,000,000 shares with the same par value. On January 17, 2005 the
Company affected a reverse split of 100 outstanding shares for one share. These
consolidated financial statements have been prepared showing post split shares
from inception. The Company was engaged in the development of the manufacture
and distribution of medical instrumentation and it became inactive after the
bankruptcy outlined below.
 
 The
Company is in the exploration stage and its efforts have been principally
devoted to the raising of capital, organizational infrastructure development and
the acquisition of oil and gas properties for the purpose of future extraction
of resources.
 
 Bankruptcy
 
 On
February 5, 2003 the Company filed a petition for bankruptcy in the District of
Prince Edward Island, Division No. 01-Prince Edward Island Court No. 1713,
Estate No. 51-104460, titled “Island Critical Care Corp.”. The Company emerged
from bankruptcy pursuant to a Bankruptcy Court Order entered on April 7, 2004
with no remaining assets or liabilities and adopted Fresh Start
Accounting.
 
 The terms
of the bankruptcy settlement included the authorization for the issuance of
150,000 post split restricted common shares in exchange for $25,000, which was
paid into the bankruptcy court by the recipient of the shares.
 
 The
Company emerged from bankruptcy as an exploration company.
 
 Going Concern
Uncertainty
 
 These
consolidated financial statements have been prepared assuming the Company will
continue as a going concern, which presumes the realization of assets and
discharge of liabilities in the normal course of business for the foreseeable
future. The Company has not generated positive cash flow since inception and has
incurred operating losses and will need additional working capital for its
future planned activities. The recent financing described in Note 9 will provide
sufficient working capital to fund the Company’s operations until mid 2008 when
additional financing will be required unless sufficient cash flow is being
obtained from the Company’s properties that comprise its near term capital
programs. The success of these programs is yet to be determined. These
conditions raise doubt about the Company’s ability to continue as a going
concern. Continuation of the Company as a going concern is dependent upon
obtaining sufficient working capital to finance ongoing operations. The
Company’s strategy to address this uncertainty includes additional equity and
debt financing; however, there are no assurances that any such financings can be
obtained on favorable terms, if at all. These financial statements do not
reflect the adjustments or reclassification of assets and liabilities that would
be necessary if the Company were unable to continue its operations.
 
 2.
RESTATEMENT
 
 In March,
2009, we determined that it was necessary to restate our unaudited financial
statements as at September 30, 2007. The purpose of the restatements is to
correct an error in measurement and an error in the application of US GAAP in
the course of recording the following September, 2007 transactions:
  Issue of common shares of
the Company in consideration for the acquisition of
properties.
  On
September 28, 2007, the Company issued to Thunder River Energy, Inc. (“Thunder”)
7,000,000 common shares of the Company as partial consideration for the
acquisition of certain unproved properties. The shares issued were recorded at a
price per share of US$2.00 or $14,000,000 which was the negotiated valuation. In
the course of a review by the Securities and Exchange Commission (“SEC”) of the
Company’s Form 10-Q for the Fiscal Quarter Ended September 30, 2007 and Form
10-K for the Fiscal Year Ended December 31, 2007, the SEC questioned the
measurement date and consequently the $2.00 per share value at which the
transaction was recorded. Following an exchange of correspondence and
discussions between the Company and the SEC during 2008 and 2009 regarding this
issue, the Company has determined that the acquisition should have been recorded
at a value per share of $2.50 or $17,500,000, which represents the fair value of
exactly comparable common shares issued at the same $2.50 price per share as a
private placement financing for 2,756,000 common shares which closed on
September 28, 2007, the same date that the Thunder transaction closed.
Management believes that the $2.50 Kodiak share price to be the most reliable
measurement for the fair value of the shares issued and that September 28, 2008
to be the appropriate measurement date because that was the date when the
parties’ closing conditions were satisfied and Thunder’s (the counterparty’s)
performance was complete. The result of the restatement adjustment would be an
increase of $3,500,000 in the recorded acquisition cost and related issuance of
common shares.
  Issue of flow-through common
shares of the Company at a premium.
  On
September 28, 2007, the Company issued on a Canadian flow-through share basis
1,866,670 common shares of the Company at US$3.00 per share or $5,600,010, which
amount represented a premium of $.50 per share or $933,335 when compared to
other non-flow through shares issued at the same time at $2.50 per share. At the
time of the transactions, the issue of the flow through common shares was
recorded as appropriate credits to par value of common shares and additional
paid in capital. Following recent discussions with the Company’s tax consultant,
the Company has determined that the $933,335 premium on flow-through common
shares issued should have, in accordance with US GAAP, been recorded as a
liability at the time the shares were issued rather than as additional paid in
capital. The premium liability was discharged during the period October, 2007 to
August, 2008 and recognized as reduction of deferred tax expense, when the
flow-through eligible expenditures were incurred by the Company.
 
 Effects
of the restatement by line item follow:
 Unaudited
Consolidated Balance Sheets
 September
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                September30,
      2007
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                30,
      2007As
      Previously Reported
                                                                
                                                                
                                                                Impact
      of Change
                                                                
                                                                
                                                                
                                                                RestatedCash
      and Short Term Deposits
                                                                
                                                                $
                                                                7,413,387
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                $
                                                                7,413,387Accounts
      Receivable
                                                                
                                                                
                                                                1,310,049
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                1,310,049Prepaid
      Expenses and Deposits
                                                                
                                                                
                                                                73,993
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                73,993Total
      current assets
                                                                
                                                                
                                                                8,797,429
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                8,797,429Other
      Assets
                                                                
                                                                
                                                                116,820
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                116,820Unproved
      Oil and Gas Properties
                                                                
                                                                
                                                                22,496,312
                                                                
                                                                
                                                                
                                                                3,500,000
                                                                
                                                                
                                                                
                                                                25,996,312Furniture
      and Fixtures
                                                                
                                                                
                                                                79,024
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                79,024Total
      Property, Plant and Equipment
                                                                
                                                                
                                                                22,575,336
                                                                
                                                                
                                                                
                                                                3,500,000
                                                                
                                                                
                                                                
                                                                26,075,336Total
      Assets
                                                                
                                                                $
                                                                31,489,585
                                                                
                                                                
                                                                
                                                                3,500,000
                                                                
                                                                
                                                                
                                                                34,989,585Accounts
      Payable
                                                                
                                                                $
                                                                1,363,251
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                1,363,251Accrued
      Liabilities
                                                                
                                                                
                                                                409,500
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                409,500Notes
      Payable
                                                                
                                                                
                                                                732,500
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                732,500Premium
      on Flow-through Shares Issued
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                933,335
                                                                
                                                                
                                                                
                                                                933,335Total
      current liabilities
                                                                
                                                                
                                                                2,505,251
                                                                
                                                                
                                                                
                                                                933,335
                                                                
                                                                
                                                                
                                                                3,438,586Asset
      Retirement Obligations
                                                                
                                                                
                                                                108,811
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                108,811Deferred
      Income Taxes
                                                                
                                                                
                                                                52,012
                                                                
                                                                
                                                                
                                                                (52,012
                                                                )
                                                                
                                                                
                                                                -2,666,074
                                                                
                                                                
                                                                
                                                                881,323
                                                                
                                                                
                                                                
                                                                3,547,397Share
      Capital
                                                                
                                                                
                                                                104,907
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                104,907Additional
      Paid in Capital
                                                                
                                                                
                                                                34,833,596
                                                                
                                                                
                                                                
                                                                2,566,665
                                                                
                                                                
                                                                
                                                                37,400,261Other
      Comprehensive Loss
                                                                
                                                                
                                                                (212,165
                                                                )
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (212,165
                                                                )Deficit
      Accumulated during the Exploration Stage
                                                                
                                                                
                                                                (5,902,827
                                                                )
                                                                
                                                                
                                                                52,012
                                                                
                                                                
                                                                
                                                                (5,850,815
                                                                )Total
      Shareholders’ Equity
                                                                
                                                                
                                                                28,823,511
                                                                
                                                                
                                                                
                                                                2,618,677
                                                                
                                                                
                                                                
                                                                31,442,188Total
      Liabilities and Shareholders’ Equity
                                                                
                                                                $
                                                                31,489,585
                                                                
                                                                
                                                                
                                                                3,500,000
                                                                
                                                                
                                                                
                                                                34,989,585
 
 There was
no impact on the Unaudited Consolidated Statements of Operations or the
Unaudited Consolidated Statement of Cash Flows.
  6
 
 3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of
Presentation
 
 These
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Kodiak Petroleum ULC, Kodiak Petroleum (Montana),
Inc., and Kodiak Petroleum (Utah), Inc. All intercompany accounts and
transactions have been eliminated.
 
 Use of Estimates in the
Preparation of Financial Statements
 
 The
preparation of financial statements in conformity with U. S. GAAP requires
management to make certain estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Although these
estimates are based on the knowledge of current events and actions the Company
may undertake in the future, they may ultimately differ from actual results.
Included in these estimates are assumptions about allowances for valuation of
deferred tax assets. Accounts receivable are stated after evaluation as to their
collectability and an appropriate allowance for doubtful accounts is provided
where considered necessary. The provision for asset retirement obligation,
depletion, as well as management’s impairment assessment on its oil and gas
properties and other long lived assets are based on estimates and by their
nature, these estimates are subject to measurement uncertainty and the effect on
the financial statements of changes in these estimates, in future periods, could
be significant. These estimates and assumptions are reviewed periodically and,
as adjustments become necessary, they are reported in earnings in the periods in
which they become known.
 
 Joint Venture
Operations
 
 In
instances where the Company’s oil and gas activities are conducted jointly with
others, the Company’s accounts reflect only its proportionate interest in such
activities.
 
 Oil and Gas
Properties
 
 Under the
full cost method of accounting for oil and gas operations all costs associated
with the exploration for and development of oil and gas reserves are capitalized
on a country-by-country basis. Such costs include land acquisition costs,
geological and geophysical expenses, carrying charges on non-producing
properties, costs of drilling both productive and non-productive wells,
production equipment and overhead charges directly related to acquisition,
exploration and development activities. Proceeds from the sale of oil and gas
properties are applied against capitalized costs with no gain or loss
recognized, unless such a sale would significantly alter the rate of depletion
and depreciation in a particular country, in which case a gain or loss on
disposal is recorded.
 
 Capitalized
costs within each country are depleted and depreciated on the unit-of-production
method based on the estimated gross proved reserves as determined by independent
petroleum engineers. Oil and gas reserves and production are converted into
equivalent units on the basis of 6,000 cubic feet of natural gas to one barrel
of oil. Depletion and depreciation is calculated using the capitalized costs,
including estimated asset retirement costs, plus the estimated future costs to
be incurred in developing proved reserves, net of estimated salvage
value.
 
 An
impairment loss is recognized in net earnings if the carrying amount of a cost
center exceeds the “cost center ceiling”. The carrying amount of the cost center
includes the capitalized costs of proved oil and natural gas properties, net of
accumulated depletion and deferred income taxes and the cost center ceiling is
the present value of the estimated future net cash flows from proved oil and
natural gas reserves discounted at ten percent (net of related tax effects) plus
the lower of cost or fair value of unproved properties included in the costs
being amortized (and/or the costs of unproved properties that have been subject
to a separate impairment test and contain no probable reserves).
 
 Costs of
acquiring and evaluating unproved properties and major development projects are
initially excluded from the depletion and depreciation calculation until it is
determined whether or not proved reserves can be assigned to such properties.
Costs of unproved properties and major development projects are transferred to
depletable costs based on the percentage of reserves assigned to each project
over the expected total reserves when the project was initiated. These costs are
assessed periodically to ascertain whether impairment has
occurred.
  7
 
 Property and
Equipment
 
 Property
and equipment is recorded at cost. Depreciation of assets is provided by use of
a declining balance method over the estimated useful lives of the related
assets. Expenditures for replacements, renewals, and betterments are
capitalized. Maintenance and repairs are charged to operations as
incurred.
 
 Asset Retirement
Obligations
 
 The
Company recognizes a liability for asset retirement obligations in the period in
which they are incurred and in which a reasonable estimate of such costs can be
made. Asset retirement obligations include those legal obligations where the
Company will be required to retire tangible long-lived assets such as producing
well sites. The asset retirement obligation is measured at fair value and
recorded as a liability and capitalized as part of the cost of the related
long-lived asset as an asset retirement cost. The asset retirement obligation
accretes until the time the asset retirement obligation is expected to settle
while the asset retirement costs included in oil and gas properties are
amortized using the unit-of-production method.
 
 Amortization
of asset retirement costs and accretion of the asset retirement obligation are
included in depletion, depreciation and accretion. Actual asset retirement costs
are recorded against the obligation when incurred. Any difference between the
recorded asset retirement obligations and the actual retirement costs incurred
is recorded in depletion, depreciation and accretion.
 
 Environmental
 
 Oil and
gas activities are subject to extensive federal, provincial, state and local
environmental laws and regulations. These laws, which are constantly changing,
regulate the discharge of materials into the environment and may require the
Company to remove or mitigate the environmental effects of the disposal or
release of petroleum or chemical substances at various sites.
 
 Environmental
expenditures are expensed or capitalized depending on their future economic
benefit. Expenditures that relate to an existing condition caused by past
operations and that have no future economic benefits are expensed. Liabilities
for expenditures of a non-capital nature are recorded when environmental
assessment and/or remediation is probable, and the costs can be reasonably
estimated. To date, the Company has not recognized any environmental obligations
as production has been insignificant and we have not actively produced since
October, 2006.
 
 Income
Taxes
 
 Income
taxes are determined using the liability method in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using the enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period that
includes the enactment date. In addition, a valuation allowance is established
to reduce any deferred tax asset for which it is determined that it is more
likely than not that some portion of the deferred tax asset will not be
realized.
 
 Flow-through
Shares
 
 The
Company finances a portion of its Canadian exploration programs with
flow-through common shares issued pursuant to certain provisions of the Income
Tax Act (Canada) (the “Act”). Under the Act, where the proceeds are used for
eligible expenditures, the related income tax deductions may be renounced to
subscribers. Accordingly, the tax credits associated with the renunciation of
such expenditures are recorded as an increase to deferred income tax
liabilities. Any premium received from subscribers on the sale of such
flow-through common shares is recorded initially as a current liability and then
discharged and recognized as a reduction of deferred income taxes when the
flow-through eligible expenditures relating to the flow-through premium are
incurred by the Company.
 
 Stock-Based
Compensation
 
 The
Company records compensation expense in the Consolidated Financial Statements
for share based payments using the fair value method pursuant to Financial
Accounting Standards Board Statement (“FASB”) No. 123R. The fair value of
share-based compensation to employees will be determined using an option pricing
model at the time of grant. Fair value for common shares issued for goods or
services rendered by non-employees are measured based on the fair value of the
goods or services received. Stock-based compensation expense is included in
general and administrative expense with a corresponding increase to Contributed
Surplus. Upon the exercise of the stock options, consideration paid together
with the previously recognized contributed surplus is recorded as an increase in
share capital.
  8
  Foreign Currency
Translation
 
 The
functional currency for the Company’s foreign operations is the Canadian dollar.
The translation from the applicable foreign currencies to U.S. dollars is
performed for assets and liabilities accounts using current exchange rates in
effect at the balance sheet date, while income, expenses and cash flows are
translated at the average exchange rates for the period. The resulting
translation adjustments are recorded as a component of other comprehensive
income. Gains or losses resulting from foreign currency transactions are
included in other income/expenses.
 
 Revenue
Recognition
 
 Revenues
from the sale of petroleum and natural gas are recorded when title passes from
the Company to its petroleum and/or natural gas purchaser and collectability is
reasonably assured. The Company will begin recording revenue once it is
determined there are proved reserves resulting in production.
 
 Loss Per Common
Share
 
 Basic
loss per common share is computed by dividing net loss by the weighted average
number of common shares outstanding for the period. Diluted loss per common
share is computed after giving effect to all dilutive potential common shares
that were outstanding during the period. Dilutive potential common shares
consist of incremental shares issuable upon exercise of stock options and
warrants, contingent stock, conversion of debentures and preferred stock
outstanding. The dilutive effect of potential common shares is not considered in
the EPS calculations for these periods if the impact would have been
anti-dilutive.
 
 
 4.
ACCOUNTS RECEIVABLE
 
 Accounts
receivable consist of the following:
 
 September
      30,
                                    2007
                                  
                                  
                                  December
      31,
                                    2006Non-operating
      Partner joint venture accounts
                                  
                                  $
                                  685,254
                                  
                                  
                                  $
                                  294,284Operator
      cash call advances
                                  
                                  
                                  76,388
                                  
                                  
                                  
                                  250,130Government
      of Canada Goods and Services Tax Claims
                                  
                                  
                                  519,780
                                  
                                  
                                  
                                  114,363Accrued
      interest receivable
                                  
                                  
                                  1,109
                                  
                                  
                                  
                                  -Other
                                  
                                  
                                  27,518
                                  
                                  
                                  
                                  27,198$
                                  1,310,049
                                  
                                  
                                  $
                                  685,975
 5.
PREPAID EXPENSES AND DEPOSITS
 
 An amount
of $186,924 (December 31, 2006 - $170,884) representing the Company’s share of a
refundable Northwest Territories work deposit with Indian & Northern Affairs
Canada was approved for refund in September, 2007 and reclassified from Prepaid
Expenses and Deposits to Accounts Receivable. The refund was received by the
Company in October, 2007.
 
 
 6. OTHER
ASSETS
 
 Other
assets represent long term deposits required by governmental regulatory
authorities for environmental obligations relating to well abandonment and site
restoration activities.
 
 September
      30,
                            
                            
                            December
      31,2007
                            
                            
                            2006Alberta
      Energy and Utility Board Drilling Deposit
                            
                            $
                            86,300
                            
                            
                            $
                            23,808Alberta
      Energy Royalty Deposit
                            
                            
                            4,706
                            
                            
                            
                            4,074British
      Columbia Oil and Gas Commission Deposit
                            
                            
                            25,814
                            
                            
                            
                            21,978$
                            116,820
                            
                            
                            $
                            49,860
 
 7.
CAPITAL ASSETS
 
 Accumulated
                                    Depreciation
                                  
                                  
                                  Net
      Book
                                    Value
                                    September
      30,Cost
                                  
                                  
                                  and
      Depletion
                                  
                                  
                                  2007Unproved
      Oil and Gas Properties:Canada
                                  
                                  $
                                  19,430,711
                                  
                                  
                                  $
                                  1,476,657
                                  
                                  
                                  $
                                  17,954,054United
      States
                                  
                                  
                                  8,042,258
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  8,042,258Sub-total
                                  
                                  
                                  27,472,969
                                  
                                  
                                  
                                  1,476,657
                                  
                                  
                                  
                                  25,996,312Furniture
      and Fixtures
                                  
                                  
                                  121,744
                                  
                                  
                                  
                                  42,720
                                  
                                  
                                  
                                  79,024Total
                                  
                                  $
                                  27,594,713
                                  
                                  
                                  $
                                  1,519,377
                                  
                                  
                                  $
                                  26,075,336
 
  9
  Accumulated
                                  Depreciation
                                
                                
                                Net
      Book
                                  Value
                                  December
      31,Cost
                                
                                
                                And
      Depletion
                                
                                
                                2006Unproved
      Oil and Gas Properties:Canada
                                
                                $
                                2,182,075
                                
                                
                                $
                                1,476,657
                                
                                
                                $
                                705,418United
      States
                                
                                
                                564,835
                                
                                
                                
                                -
                                
                                
                                
                                564,835Sub-total
                                
                                
                                2,746,910
                                
                                
                                
                                1,476,657
                                
                                
                                
                                1,270,253Furniture
      and Fixtures
                                
                                
                                69,564
                                
                                
                                
                                13,761
                                
                                
                                
                                55,803Total
                                
                                $
                                2,816,474
                                
                                
                                $
                                1,490,418
                                
                                
                                $
                                1,326,056
 
 
 During
the nine months ended September 30, 2007, the Company capitalized $84,602
(December 31, 2006 - $ Nil) of general and administrative personnel costs
attributable to acquisition, exploration and development
activities.
 
 Unproved
Properties
 
 Included
in oil and gas properties are the following costs related to Canadian and United
States unproved properties, valued at cost, that have been excluded from costs
subject to depletion:
  September
      30,
                                    2007
                                  
                                  
                                  December
      31,
                                    2006CanadaLand
      acquisition and retention
                                  
                                  $
                                  11,248,600
                                  
                                  
                                  $
                                  84,263Geological
      and geophysical costs
                                  
                                  
                                  5,820,900
                                  
                                  
                                  
                                  241,017Exploratory
      drilling
                                  
                                  
                                  617,404
                                  
                                  
                                  
                                  192,430Tangible
      Equipment and Facilities
                                  
                                  
                                  194,806
                                  
                                  
                                  
                                  187,708Other
                                  
                                  
                                  72,344
                                  
                                  
                                  
                                  -$
                                  17,954,054
                                  
                                  
                                  $
                                  705,418United
      StatesLand
      acquisition and retention
                                  
                                  $
                                  7,416,086
                                  
                                  
                                  $
                                  -Geological
      and geophysical costs
                                  
                                  
                                  193,015
                                  
                                  
                                  
                                  132,000Exploratory
      drilling
                                  
                                  
                                  409,246
                                  
                                  
                                  
                                  408,924Tangible
      Equipment and Facilities
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Other
                                  
                                  
                                  23,911
                                  
                                  
                                  
                                  23,911$
                                  8,042,258
                                  
                                  
                                  $
                                  564,835$
                                  25,996,312
                                  
                                  
                                  $
                                  1,270,253
 
 Drilling
programs are being planned for our North West Territories and British Columbia
properties in Canada and our New Mexico property in the United States. It is
estimated by management that the unproved property costs associated with these
three properties, which in the aggregate constitutes approximately $25 million
of our total unproved property costs as at September 30, 2007, will be included
in our costs subject to depletion in the future.
 
 Ceiling
Test
 
 The
Company has performed ceiling tests for unproved properties in its Canadian and
United States geographical cost centers and has determined that no impairment
exists as at September 30, 2007. As at December 31, 2006, it was determined that
impairment existed in the Canadian unproved properties cost center and
consequently, a ceiling test write-down of $1,419,946 was recorded and included
in depletion, depreciation and accretion expense.
 
 Property
Acquisition
 
 On
September 28, 2007 the Company purchased from Thunder Energy, Inc.
(“Thunder”)and CIMA Holdings, Inc.(“CIMA”), a subsidiary of Thunder, under the
terms of a Purchase and Sale Agreement, 100% of Thunder’s interest in its EL 413
Exploration License in the Northwest Territories and 100% of CIMA’s interest in
their New Mexico properties in consideration for $1 million cash and 7 million
common shares of the Company valued at $14,000,000 ($2.00 per common share) and
a commitment to issue in the future an additional 6,000,000 common shares of the
Company upon the achievement of certain milestones in connection with the
acquired properties. All acquired properties are unproved. For accounting
purposes, the 7 million common shares issued to Thunder were recorded at a value
of $17,500,000 or $2.50 per common share, being the same price per share at
which the September 28, 2007 private placement financing of 2,756,000
non-flow-through common shares were issued. September 28, 2007 was considered to
be the appropriate measurement date to use for the determining the fair value of
the common shares issued as the non-cash consideration for the property
acquisition. (See Notes 2 and 10).
 
 Of the
cash consideration, $100,000 was paid as a deposit on July 11, 2007, and the
balance of $900,000 was paid at closing on September 28, 2007. Of the common
shares consideration, 7 million shares were issued to Thunder at closing on
September 28, 2007. An additional 6 million shares will be issued to Thunder if,
as, and when certain performance milestones are achieved, including 2 million
shares upon completion of a 2007/08 seismic program by June 30, 2008; 1 million
shares upon the spudding of a shallow depth well (1,500 meters TD) by March 31,
2009; 1.5 million shares upon the spudding of a medium depth well (2,500 meters
TD) before lease expiry in 2009 and 1.5 million shares upon conversion of any
part of EL 413 to a Significant Discovery Lease. If, as a result of the
Company’s exploration and development activities on the acquired properties,
reserves in place exceed 100 million barrels, then, for each excess 10 million
barrels in place, 100,000 additional shares could be issued, up to a maximum of
5 million additional shares.
 
 8.
DEBT
 
 Notes
Payable
 
 During
the second and third quarters of 2007, the Company received $3,300,000 in
advances from a European lender which bear interest at 91⁄2% per annum and are
unsecured. As at September 30, 2007, interest of $94,055 has been accrued. On
September 28, 2007, the lender was repaid $2,567,500 in 1,027,000 common shares
issued as part of the financing described in Note 9. On October 1, 2007, the
balance was repaid in full in cash with accrued interest.
  10
  2007
                              
                              
                              2006Advances
      during the nine months ended September 30
                              
                              $
                              3,300,000
                              
                              
                              $
                              NilAmount
      repaid September 28
                              
                              
                              2,567,500
                              
                              
                              
                              NilBalance
      September 30
                              
                              $
                              732,500
                              
                              
                              $
                              Nil
 
 
 9. ASSET
RETIREMENT OBLIGATIONS
 
 Changes
in the carrying amounts of the asset retirement obligations associated with the
Company’s oil and natural gas properties are as follows:
 
 Asset
      Retirement Obligations, December 31, 2005
                          
                          $
                          -Obligations
      incurred
                          
                          
                          86,193Accretion
                          
                          
                          4,718Asset
      retirement obligations, December 31, 2006
                          
                          
                          90,911Obligations
      incurred
                          
                          
                          11,796Accretion
                          
                          
                          6,104Asset
      retirement obligations, September 30, 2007
                          
                          $
                          108,811
 
 At
September 30, 2007, the estimated total undiscounted amount required to settle
the asset retirement obligations was $ 175,346 (December 31, 2006 - $97,472).
These obligations will be settled at the end of the useful lives of the
underlying assets, which currently extends up to 8 years into the future. This
amount has been discounted using a credit adjusted risk-free interest rate of
7.5% and a rate of inflation of 2.5%.
 
 10. SHARE
CAPITAL
 
 Authorized:
 September
30, 2007 and December 31, 2006 – 300,000,000 common shares at $0.001 par
value
 
 At the
annual general meeting held on July 18, 2006, the shareholders of the Company
voted in favor of increasing the authorized common shares to
300,000,000.
 
 The
following share capital transactions occurred during the periods:
 
 Issued
                                
                                Number
                                
                                
                                Par
      Value
                                
                                
                                Additional
                                  Paid
      in CapitalBalance
      December 31, 2005
                                
                                
                                474,028
                                
                                
                                $
                                474
                                
                                
                                $
                                834,561Private
      Placement, net of costs(a)
                                
                                
                                16,000,000
                                
                                
                                
                                16,000
                                
                                
                                
                                756,655Private
      Placement, net of costs(b)
                                
                                
                                933,324
                                
                                
                                
                                933
                                
                                
                                
                                1,259,067Issued
      for service(c)
                                
                                
                                1,000,000
                                
                                
                                
                                1,000
                                
                                
                                
                                40,1892:1
      Stock split(d)
                                
                                
                                18,407,362
                                
                                
                                
                                18,407
                                
                                
                                
                                (18,407
                                )Issued
      for service, net of costs(e)
                                
                                
                                7,500,000
                                
                                
                                
                                7,500
                                
                                
                                
                                314,4742:1
      Stock split(f)
                                
                                
                                44,314,714
                                
                                
                                
                                44,315
                                
                                
                                
                                (44,315
                                )Private
      Placement, net of costs(g)
                                
                                
                                1,130,000
                                
                                
                                
                                1,130
                                
                                
                                
                                1,766,130Private
      Placement, net of costs(h)
                                
                                
                                187,500
                                
                                
                                
                                187
                                
                                
                                
                                235,254Stock-based
      compensation (note 11)
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                69,169Balance
      December 31, 2006
                                
                                
                                89,946,928
                                
                                
                                
                                89,946
                                
                                
                                
                                5,212,777Private
      Placement, net of costs (h)
                                
                                
                                30,000
                                
                                
                                
                                30
                                
                                
                                
                                38,298Private
      Placement, net of costs (i)
                                
                                
                                440,000
                                
                                
                                
                                440
                                
                                
                                
                                499,560Private
      Placement, net of costs (j)
                                
                                
                                420,000
                                
                                
                                
                                420
                                
                                
                                
                                474,580Private
      Placement, net of costs (k)
                                
                                
                                2,447,900
                                
                                
                                
                                2,448
                                
                                
                                
                                2,777,427Private
      Placement, net of costs (l)
                                
                                
                                2,756,000
                                
                                
                                
                                2,756
                                
                                
                                
                                6,218,489Private
      Placement, net of costs (l)
                                
                                
                                1,866,670
                                
                                
                                
                                1,867
                                
                                
                                
                                4,216,808Private
      Placement (m)
                                
                                
                                7,000,000
                                
                                
                                
                                7,000
                                
                                
                                
                                17,493,000Stock-based
      compensation (Note 11)
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                469,322Balance
      September 30, 2007
                                
                                
                                104,907,498
                                
                                
                                $
                                104,907
                                
                                
                                $
                                37,400,261
  11
 
 Shares to
be Issued
 2007
                                  
                                  
                                  2006Number
                                  
                                  
                                  Value
                                  
                                  
                                  Number
                                  
                                  
                                  ValueOpening
      Balance
                                  
                                  
                                  470,000
                                  
                                  
                                  $
                                  538,328
                                  
                                  
                                  
                                  16,000,000
                                  
                                  
                                  $
                                  773,637Issued
      during the period
                                  
                                  
                                  (470,000
                                  )
                                  
                                  
                                  (538,328
                                  )
                                  
                                  
                                  (16,000,000
                                  )
                                  
                                  
                                  (773,637
                                  )Private
      Placement, net of costs (h)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  30,000
                                  
                                  
                                  
                                  38,768Private
      Placement, net of costs (i)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  440,000
                                  
                                  
                                  
                                  499,560Closing
      Balance
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  470,000
                                  
                                  
                                  $
                                  538,328
   (a)
                On
      January 13, 2006, 16,000,000 shares of common stock were issued pursuant
      to two private placements that closed December 22, 2005 (13,650,000 shares
      for gross proceeds of $300,000) and December 30, 2005 (910,000 shares, for
      gross proceeds of $500,000) respectively, recorded as “Shares Issuable” at
      December 31, 2005 in the amount of $773,637 (net of share issue costs of
      $26,363) as the share certificates were not issued until January 13,
      2006.
 
 (b)
                In
      January, 2006, the Company closed a private placement for 933,324 common
      shares at a price of $1.50 per share for gross proceeds of $1,400,000.
      Share issue costs associated with this private placement totaled
      $140,000.
 
 (c)
                In
      January, 2006, the Company issued 1,000,000 shares to settle debt of
      $41,189 pursuant to the stock for services compensation plan. A beneficial
      conversion feature of $808,811 was calculated on the debt for the year
      ended December 31, 2005 representing the difference between the conversion
      price and the fair value of the common stock at the commitment date. This
      amount was recorded as interest expense and an increase in additional paid
      in capital for the year ended December 31,
2005.
 
 (d)
                On
      February 20, 2006 the Company’s stock split forward by paying a stock
      dividend to our existing shareholders. All shareholders of record on
      February 14, 2006 received 1 dividend share for every share they owned
      amounting to 18,407,362 shares of common stock
  issued.
 
 (e)
                During
      2006, the Company issued 7,500,000 common shares, pursuant to an S8
      registration, for services provided to the Company that have been recorded
      under the provisions of SFAS No. 123R relating to transactions with
      non-employees where the fair value of the investor relations services
      rendered has been recorded as General & Administrative Expense and an
      increase in Additional Paid In Capital (less share issue costs of $15,526.
      The recorded value of the transaction was $337,500 and was based on the
      value of the invoices rendered for the services provided and an allowance
      for the lack of liquidity in the market for the Company’s common shares.
      These transactions were in the normal course of business and agreed to by
      the non-employees and the Company based on negotiation and accordingly had
      been measured at the exchange
amounts.
 
 (f)
                On
      May 1, 2006 the Company’s stock split forward by paying a stock dividend
      to our existing shareholders. All shareholders of record on April 28, 2006
      received 1 dividend share for every share they owned amounting to
      44,314,714 shares of common stock
issued.
 
 
 (g)
                In
      June 2006 the Company closed a private placement for 1,130,000 units at a
      price of $1.70 per unit for gross proceeds of $1,921,000. Each unit
      entitled the subscriber to one common share of the Company and one
      warrant. Share issue costs associated with this private placement totaled
      $153,740. Each warrant entitles the warrant holder to exchange one warrant
      for one common share at a price of $2.70 until June 30, 2008 and for $3.50
      until June 30, 2009.
 
 (h)
                In
      December 2006, the Company closed private placements for 54,375 units
      (217,050 common shares) at a price per unit of $6.40 Cdn. ($1.60 Cdn. per
      share) for aggregate proceeds of $348,000. Each unit entitles the
      subscriber to three flow-through common shares and one common share. The
      flow-through shares entitle the holder to a Canadian Exploration Expense
      deduction under the Canada Income Tax Act. Of these shares, 30,000 were
      classified, net of share issue costs of $38,328, as Shares To Be Issued as
      at December 31, 2006 as the share certificates were not issued until
      February, 2007.
 
 (i)
                On
      December 22, 2006, the Company received proceeds for a private placement
      of 440,000 units at a price of $1.25 per unit that closed on February 20,
      2007 for gross proceeds of $550,000. Each unit entitled the subscriber to
      one common share of the Company and one warrant. These common shares were
      classified, net of share issue costs of $50,000, as Shares To Be Issued as
      at December 31, 2006 as the share certificates were not issued until
      January, 2007. Each warrant entitles the warrant holder to exchange one
      warrant for one common share at a price at a price of $1.50 until December
      22, 2008.
  12
 
 (j)
                On
      February 20, 2007, the Company closed a private placement for 420,000
      units at a price of $1.25 per unit for gross proceeds of $525,000. Each
      unit entitled the subscriber to one common share of the Company and one
      warrant. Each warrant entitles the warrant holder to exchange one warrant
      for one common share at a price at a price of $1.50 until February 20,
      2009. Share issue costs associated with this private placement totaled
      $50,000.
 
 (k)
                On
      May 10, 2007, the Company closed a private placement for 2,447,900 units
      at a price of $1.25 per unit for gross proceeds of $3,059,875. Each unit
      entitled the subscriber to one common share of the Company and one
      warrant. Each warrant entitles the warrant holder to exchange one warrant
      for one common share at a price at a price of $1.50 until May 10, 2009.
      Share issue costs associated with this private placement totaled
      $280,000.
 
 (l)
                On
      September 28, 2007, the Company closed a brokered private placement
      offering for an aggregate of 4,622,670 common shares for aggregate gross
      proceeds of $12,490,010. Of the total number of shares, 2,756,000 were
      sold at a purchase price of $2.50 per share for gross proceeds of
      $6,890,000 and 1,866,670 were sold at a purchase price of $3.00 for gross
      proceeds of $5,600,010. Share issue costs associated with this offering
      totaled $1,116,755. The shares sold at $3.00 were sold on the basis that
      the Company would provide the purchaser a Canadian tax flow through
      advantage. The $.50 per share premium received from subscribers on the
      sale of such flow-through common shares amounting to $933,335 was recorded
      as a current liability. In connection with the offering, the broker was
      granted warrants to purchase, until March 28, 2009, (i) 220,480 common
      shares of the Company at a price of $2.50 per share and (ii) 149,334
      common shares of the Company at a price of $3.00 per share. The broker was
      also was also granted a right of first refusal for future securities
      offerings in Canada and investment banking and advisory rights for a
      period of 18 months. The Company will seek a listing on the Toronto
      Venture Stock Exchange for its common shares. If the Company does not have
      such listing in place by December 28, 2007, then it will pay in cash to
      the September 28, 2007 private placement investors a penalty amount of 2%
      per month until such listing is achieved. The penalty provision is not
      limited as to time or amount.
 
 (m)
                On
      September 28, 2007, the Company issued 7,000,000 common shares valued at
      $14,000,000 ($2.00 per share) as partial consideration for the acquisition
      of certain undeveloped oil and gas properties in Canada and the United
      States. The Company also committed to issue up to an additional 11,000,000
      common shares of the Company upon the achievement of certain milestones in
      connection with the acquired properties as set out in Note 7. For
      accounting purposes, the 7 million common shares issued to Thunder were
      recorded at a value of $17,500,000 or $2.50 per common share, being the
      same price per share at which the September 28, 2007 private placement
      financing of 2,756,000 (l) non-flow-through common shares were issued
      (Note 2).
 
 At
September 30, 2007, the following common shares were reserved for
issuance:
 
 Exercise
                                                              
                                                              
                                                              Equivalent
      Shares
                                                              
                                                              
                                                              Weighted
                                                                Average
                                                                Years
      to
                                                              
                                                              
                                                              Option
                                                                SharesPrice
      ($)
                                                              
                                                              
                                                              Outstanding
                                                              
                                                              
                                                              Expiry
                                                              
                                                              
                                                              VestedStock
      Option Plan
                                                              
                                                              $1.28-$2.74
                                                              
                                                              
                                                              
                                                              2,035,000
                                                              
                                                              
                                                              4.26
                                                              
                                                              
                                                              NilJune
      2006 Warrants
                                                              
                                                              $2.70-$3.50
                                                              
                                                              
                                                              
                                                              1,130,000
                                                              
                                                              
                                                              3.75
                                                              
                                                              
                                                              -February
      2007 Warrants
                                                              
                                                              $1.50
                                                              
                                                              
                                                              
                                                              860,000
                                                              
                                                              
                                                              1.39
                                                              
                                                              
                                                              -May
      2007 Warrants
                                                              
                                                              $1.50
                                                              
                                                              
                                                              
                                                              2,447,900
                                                              
                                                              
                                                              1.51
                                                              
                                                              
                                                              -September
      2007 Warrants
                                                              
                                                              $2.50
                                                              
                                                              
                                                              
                                                              220,480
                                                              
                                                              
                                                              1.49
                                                              
                                                              
                                                              -September
      2007 Warrants
                                                              
                                                              $3.00
                                                              
                                                              
                                                              
                                                              149,334
                                                              
                                                              
                                                              1.49
                                                              
                                                              
                                                              -Thunder
      Acquisition (Notes 5 and 8)
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              11,000,000Total
      Shares Reserved
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              17,842,714
 
 Pursuant
to private placements in 2006 and 2007, the Company had 4,807,714 warrants
outstanding as at September 30, 2007 (December 31, 2006 – 1,570,000). Each of
the 1,130,000 June 2006 warrants entitles the warrant holder to exchange one
warrant for one common share at a price of $2.70 until June 30, 2008 and $3.50
from July 1, 2008 to June 30, 2011. Each of the 860,000 February 2007 warrants
entitles the warrant holder to exchange one warrant for one common share at a
price of $1.50 until February 20, 2009. Each of the 2,447,900 May 2007 warrants
entitles the warrant holder to exchange one warrant for one common share at a
price of $1.50 until May 10, 2009. Of the September, 2007 warrants, 220,480
entitle the holder to exchange one warrant for one common share at a price of
$2.50 until March 28, 2009 and 149,334 entitle the holder to exchange one
warrant for one common share at a price of $3.00 until March 29,
2009.
  13
 The
Company has a stock option plan under which it may grant options to its
directors, officers, employees and consultants for up to a maximum of 10% of its
issued and outstanding common shares at market price at the date of grant for up
to a maximum term of five years. Options are exercisable equally over the first
three years of the term of the option. As at September 30, 2007, none of the
outstanding options were exercised. On October 23, 2006, the Company granted
options for 1,000,000 common shares to five directors of the Company. Also on
October 23, 2006 the Company granted options for 280,000 common shares to an
officer of the Company, which options were cancelled in December 2006. On
December 1, 2006, the Company granted options for 125,000 common shares to a
consultant of the Company. During the first nine months of 2007, the Company
granted options for 910,000 common shares to an officer, four consultants of the
Company and to three senior advisors of the Company.
 
 A summary
of the status of the stock option plan is as follows:
 Expiry
                                    
                                    Number
      of
                                      Option
                                    
                                    
                                    Weighted
                                      Average
                                      ExerciseDate
                                    
                                    Shares
                                    
                                    
                                    PriceBalance
      December 31, 2005
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Options
      Granted October 23, 2006
                                    Oct
      23/11
                                    
                                    
                                    1,280,000
                                    
                                    
                                    $
                                    1.50Options
      Cancelled
                                    
                                    
                                    
                                    (280,000
                                    )
                                    
                                    $
                                    1.50Options
      Granted December 1, 2006
                                    Dec
      1/11
                                    
                                    
                                    125,000
                                    
                                    
                                    $
                                    1.28Balance
      December 31, 2006
                                    
                                    
                                    
                                    1,125,000
                                    
                                    
                                    $
                                    1.48Options
      Granted January 3, 2007
                                    Jan
      3/12
                                    
                                    
                                    280,000
                                    
                                    
                                    $
                                    1.29Options
      Granted February 1, 2007
                                    Feb
      1/12
                                    
                                    
                                    100,000
                                    
                                    
                                    $
                                    1.35Options
      Granted April 2, 2007
                                    Apr
      2/12
                                    
                                    
                                    300,000
                                    
                                    
                                    $
                                    1.75Options
      Granted August 1, 2007
                                    Aug
      1/12
                                    
                                    
                                    230,000
                                    
                                    
                                    $
                                    2.74Balance
      September 30, 2007
                                    
                                    
                                    
                                    2,035,000
                                    
                                    
                                    $
                                    1.63
 
 11.
STOCK-BASED COMPENSATION
 
 Stock
Options
 
 In
accordance with Financial Accounting Standards Board Statement (“FASB”) No.
123R, the Company uses the Black-Scholes option pricing method to determine the
fair value of each option granted and the amount is recognized as additional
expense in the statement of earnings over the vesting period of the option. The
fair value of each option granted has been estimated using the following average
assumptions:
 2007
                                  
                                  
                                  2006Risk
      free interest rate
                                  
                                  3.94-4.57%
                                  
                                  
                                  3.74-4.11%Expected
      holding period
                                  
                                  3
      years
                                  
                                  
                                  3
      yearsShare
      price volatility
                                  
                                  75%
                                  
                                  
                                  75%Estimated
      annual common share dividend
                                  
                                  -
                                  
                                  
                                  -
 
 The fair
value of options granted during the nine months ended September 30, 2007 totaled
$1,056,510 (September 30, 2006 - $ Nil). The amount of share-based compensation
expense recorded during the nine months ended September 30, 2007 is $ 469,322
(September 30, 2006 – $ Nil) and has been credited to additional paid in
capital. The balance of the fair value of the options to be expensed in future
periods is $1,725,676 (December 31, 2006 - $1,012,831) over a vesting period of
three years.
 
  14
  12.
INCOME TAXES
  At
September 30, 2007, the Company's deferred tax asset is attributable to its net
operating loss carry forward of approximately $3,448,000 (December 31, 2006 -
$647,000), which will expire if not utilized in the years 2024, 2025 and 2026.
Of this amount, approximately $400,000 (December 31, 2006 - $397,000) is
attributable to the Company's Canadian operations. As reflected below, this
benefit has been fully offset by a valuation allowance based on management's
determination that it is not more likely than not that some or all of this
benefit will be realized.
  For the periods ended September 30, 2007, December 31, 2006 and
for the cumulative period April 7, 2004 (Date of Inception) to September 30,
2007, a reconciliation of income tax benefit at the U.S. federal statutory rate
to income tax benefit at the Company's effective tax rates is as
follows.
  2007
                            
                            
                            2006
                            
                            
                            CumulativeIncome
      tax benefit at statutory rate
                            
                            $
                            624,000
                            
                            
                            $
                            1,080,000
                            
                            
                            $
                            2,123,000Permanent
      Differences
                            
                            
                            2,000
                            
                            
                            
                            (132,000
                            )
                            
                            
                            (410,000
                            )State
      tax benefit, net of federal taxes
                            
                            
                            33,000
                            
                            
                            
                            1,000
                            
                            
                            
                            45,000Foreign
      taxes, net of federal benefit
                            
                            
                            (69,000
                            )
                            
                            
                            12,000
                            
                            
                            
                            (55,000
                            )Change
      in valuation allowance
                            
                            
                            (590,000
                            )
                            
                            
                            (961,000
                            
                            
                            
                            (1,704,000
                            )Income
      tax benefit at effective rate
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            -
 
 Deferred
tax assets (liabilities) at September 30, 2007 and December 31, 2006 are
comprised of the following:
 
 2007
                                  
                                  
                                  2006Deferred
      tax assetsDeferred
      costs
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  443,000Net
      operating loss carryover
                                  
                                  
                                  3,448,000
                                  
                                  
                                  
                                  647,000Revision
      to tax account estimates
                                  
                                  
                                  177,000
                                  
                                  
                                  
                                  -Other
                                  
                                  
                                  6,000
                                  
                                  
                                  
                                  24,000Total
      deferred tax asset
                                  
                                  
                                  3,631,000
                                  
                                  
                                  
                                  1,114,000Deferred
      Tax liabilitiesExcess
      tax deductions over book amountswritten
      off
                                  
                                  
                                  1,927,000
                                  
                                  
                                  
                                  -Net
      deferred tax asset before valuation allowance
                                  
                                  
                                  1,704,000
                                  
                                  
                                  
                                  1,114,000Less
      valuation allowance
                                  
                                  
                                  (1,704,000
                                  )
                                  
                                  
                                  (1,114,000
                                  )Net
      deferred tax asset
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
 
 
 13. LOSS
PER SHARE
 
 A
reconciliation of the numerator and denominator of basic and diluted loss per
share is provided as follows:
  15
 
 Three
      Months
                                      Ended
                                      September
      30,
                                    
                                    
                                    Three
      Months
                                      Ended
                                      September
      30,
                                    
                                    
                                    Nine
      Months
                                      Ended
                                      September
      30,
                                    
                                    
                                    Nine
      Months
                                      Ended
                                      September
      30,2007
                                    
                                    
                                    2006
                                    
                                    
                                    2007
                                    
                                    
                                    2006Numerator:Numerator
      for basic and diluted loss per shareNet
      Loss
                                    
                                    $
                                    (825,945
                                    )
                                    
                                    $
                                    (707,893
                                    )
                                    
                                    $
                                    (1,787,039
                                    )
                                    
                                    $
                                    (1,484,574
                                    )Denominator:Denominator
      for basic loss per shareWeighted
      average shares outstanding
                                    
                                    
                                    93,663,368
                                    
                                    
                                    
                                    89,759,428
                                    
                                    
                                    
                                    92,380,591
                                    
                                    
                                    
                                    63,327,073In
      the money stock options
                                    
                                    
                                    922,311
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    776,162
                                    
                                    
                                    
                                    -In
      the money warrants
                                    
                                    
                                    1,763,788
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    968,930
                                    
                                    
                                    
                                    -Contingent
      Thunder shares
                                    
                                    
                                    146,739
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    49,451
                                    
                                    
                                    
                                    -Denominator
      for diluted loss per shareWeighted
      average shares outstanding
                                    
                                    
                                    96,496,206
                                    
                                    
                                    
                                    89,759,428
                                    
                                    
                                    
                                    94,195,133
                                    
                                    
                                    
                                    63,327,073Basic
      and diluted loss per share
                                    
                                    $
                                    (0.01
                                    )
                                    
                                    $
                                    (0.01
                                    )
                                    
                                    $
                                    (0.02
                                    )
                                    
                                    $
                                    (0.02
                                    )
 
 The
weighted average number of shares outstanding for 2006 have been adjusted
retroactively for the two 2:1 stock splits that occurred in that
year.
 
 Of the
contingent shares related to the Thunder transaction, only 4.5 million shares of
the 11 million total contingent shares are assumed to be issued for purposes of
the diluted loss per share calculation. The 7.5 million shares relating to the
significant discovery and production milestones as set out in Note 5 have been
excluded because their inclusion would be anti-dilutive.
   14.
CONTINGENCIES AND COMMITMENTS
 
 Private Placement
Commitments
  On
September 28, 2007, the Company closed a brokered private placement offering for
an aggregate of 4,622,670 common shares for aggregate gross proceeds of
$12,490,010 as more fully set out in Note 10. Under the terms of the agency
agreement with the broker, the Company committed to seek a listing on the
Toronto Venture Stock Exchange (TSXV) for its common shares. If the Company does
not have such listing in place by December 28, 2007, then it will pay in cash to
the September 28, 2007 private placement investors a penalty amount of 2% per
month ($249,708) until such listing is achieved. The penalty provision is not
limited as to time or amount. There is no assurance that the listing of the
common stock on the TSXV will be obtained prior to the December 28, 2007 date or
ever. The Company intends to pursue the listing vigorously.
  Of
the 4,622,670 total shares sold in the private placement, 1,866,670 were
sold at a purchase price of $3.00 for gross proceeds of $5,600,010 and on the
basis that the Company would provide the purchaser a Canadian tax flow through
deduction. In order to provide such flow through share tax deduction benefits to
the investors, the Company has committed to expend the proceeds on eligible
capital expenditures in Canada prior to December 31, 2008 and renounce such
expenditures to the flow through share investors. Failure to incur the eligible
expenditures or failure to renounce such expenditures to the investors could
result in a liability of the Company for any Canadian tax consequences to the
investors. As at September 30, 2007, the Company has not incurred any eligible
expenditures and therefore has a balance of $5,600,010 to spend by December 31,
2008.
 
 Thunder Acquisition
Commitments
 
 On
September 28, 2007 the Company purchased from Thunder certain unproved
properties in Canada and the United States in consideration for cash and common
shares of the Company as set out more fully in Note 5. As part of the
transaction, the Company has committed to issue in the future up to 11 million
additional common shares of the Company upon the achievement of certain
milestones in connection with the acquired properties, including 6 million
shares to be issued as follows: 2 million shares upon completion of a 2007/08
seismic program by June 30, 2008; 1 million shares upon the spudding of a
shallow depth well (1,500 meters TD) by March 31, 2009; 1.5 million shares upon
the spudding of a medium depth well (2,500 meters TD) before lease expiry in
2009 and 1.5 million shares upon conversion of any part of EL 413 to a
Significant Discovery Lease. If, as a result of the Company’s exploration and
development activities on the acquired properties, reserves in place exceed 100
million barrels, then, for each excess 10 million barrels in place, 100,000
additional shares could be issued, up to a maximum of 5 million additional
shares.
  16
 
 15. FINANCIAL INSTRUMENTS
 
 The
Company, as part of its operations, carries a number of financial instruments.
It is management’s opinion that the Company is not exposed to significant
interest, credit or currency risks arising from these financial instruments
except as otherwise disclosed.
 
 The
Company’s financial instruments, including cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities and notes payable are carried
at values that approximate their fair values due to their relatively short
maturity periods.
 
 
 16.
RELATED PARTY TRANSACTIONS
 
 During
the nine months ended September 30, 2006, the Company paid $61,087 to companies,
which at that date beneficially owned 8.1% of the Company, for investor
relations services. Of this amount $46,087 is included in Administrative
Expenses and $15,000 is in Prepaid Expenses.
 
 During
the year ended December 31, 2006, the Company issued 2,000,000 common shares of
the Company in consideration for corporate development services rendered to the
Company by an individual, who beneficially owned 9.3% of the Company. The shares
were valued at market price of $.05 per share and were recorded as General and
Administrative Expense and an addition to Additional Paid in
Capital.
 
 For the
nine months ended September 30, 2007, the Company paid $78,103 (2006 - $62,192),
including $12,002 owing as at September 30, 2007 (December 31, 2006 - $ nil) to
Sicamous Oil & Gas Consultants Ltd., a company owned by the President &
Chief Operating Officer of the Company during those periods for consulting
services rendered to the Company. These amounts were charged to General and
Administrative Expense. This individual became Chief Executive Officer of the
Company, effective December 1, 2007.
 
 For the
nine months ended September 30, 2007, the Company paid $40,851 (2006 - $40,080),
including $6,114 owing as at September 30, 2007 (December 31, 2006 - $ nil) to
MHC Corp., a company owned by the Chief Executive Officer of the Company during
those periods for consulting services rendered to the Company. These amounts
were charged to General and Administrative Expense. This individual resigned as
Chief Executive Officer of the Company, effective December 1, 2007.
 
 For the
nine months ended September 30, 2007, the Company paid $55,928, (2006 - $ nil),
including $9,731 owing as at September 30, 2007 (December 31, 2006 - $ nil) to
Harbour Oilfield Consulting Ltd., a company owned by the Vice President –
Operations of the Company for consulting services rendered to the Company. These
amounts were charged to General and Administrative Expense
 
 For the
nine months ended September 30, 2007, the Company paid $91,310 (2006 - $ nil),
including $15,993 owing as at September 30, 2007 (December 31, 2006 - $ nil) to
the Chief Financial Officer of the Company for services rendered to the Company.
These amounts were charged to General and Administrative Expense.
 
 These
related party transactions were in the normal course of business and agreed to
by the related parties and the Company based on negotiations and Board approval
and accordingly had been measured at the exchange amounts.
 
 As at
September 30, 2007 and December 31, 2006, no other amounts were owing to any
related parties for services rendered.
  17
 
 17.
SEGMENTED INFORMATION
 
 The
Company’s geographical segmented information is as follows:
 
 Three
      Months Ended Sept. 30, 2007
                        
                        
                        Nine
      Months Ended Sept. 30, 2007U.
      S.
                        
                        
                        Canada
                        
                        
                        Total
                        
                        
                        U.
      S.
                        
                        
                        Canada
                        
                        
                        TotalIncome
      during   the evaluation period
                        
                        $
                        -
                        
                        
                        
                        (202
                        )
                        
                        
                        (202
                        )
                        
                        
                        -
                        
                        
                        
                        225
                        
                        
                        
                        225Net
      Loss
                        
                        
                        18,007
                        
                        
                        
                        807,938
                        
                        
                        
                        825,945
                        
                        
                        
                        30,563
                        
                        
                        
                        1,756,476
                        
                        
                        
                        1,787,039Capital
      Assets
                        
                        
                        8,042,258
                        
                        
                        
                        18,033,076
                        
                        
                        
                        26,075,336
                        
                        
                        
                        8,042,258
                        
                        
                        
                        18,033,078
                        
                        
                        
                        26,075,336Total
      Assets
                        
                        
                        8,131,635
                        
                        
                        
                        26,857,950
                        
                        
                        
                        34,989,585
                        
                        
                        
                        8,131,635
                        
                        
                        
                        26,857,950
                        
                        
                        
                        34,989,585Capital
      Expenditures
                        
                        
                        7,452,373
                        
                        
                        
                        11,079,643
                        
                        
                        
                        18,532,016
                        
                        
                        
                        7,477,423
                        
                        
                        
                        17,270,182
                        
                        
                        
                        24,747,605
 
 Three
      Months Ended Sept. 30, 2006
                        
                        
                        Nine
      Months Ended Sept. 30, 2006U.
      S.
                        
                        
                        Canada
                        
                        
                        Total
                        
                        
                        U.
      S.
                        
                        
                        Canada
                        
                        
                        TotalIncome
      during the evaluation period
                        
                        $
                        -
                        
                        
                        
                        10,331
                        
                        
                        
                        10,331
                        
                        
                        
                        -
                        
                        
                        
                        10,331
                        
                        
                        
                        10,331Net
      Loss
                        
                        
                        10,833
                        
                        
                        
                        697,060
                        
                        
                        
                        707,893
                        
                        
                        
                        13,500
                        
                        
                        
                        1,471,075
                        
                        
                        
                        1,484,574Capital
      Assets
                        
                        
                        248,871
                        
                        
                        
                        1,239,613
                        
                        
                        
                        1,488,484
                        
                        
                        
                        248,871
                        
                        
                        
                        1,239,613
                        
                        
                        
                        1,488,484Total
      Assets
                        
                        
                        564,873
                        
                        
                        
                        2,001,746
                        
                        
                        
                        2,566,619
                        
                        
                        
                        564,873
                        
                        
                        
                        2,001,746
                        
                        
                        
                        2,566,619Capital
      Expenditures
                        
                        
                        116,871
                        
                        
                        
                        268,714
                        
                        
                        
                        385,585
                        
                        
                        
                        116,871
                        
                        
                        
                        1,492,987
                        
                        
                        
                        1,609,858
  
 18. CHANGES IN NON-CASH WORKING CAPITAL
 Three
                                  Months
                                  Ended
                                  Sept.
      30,
                                
                                
                                Three
                                  Months
                                  Ended
                                  Sept.
      30,
                                
                                
                                Nine
                                  Months
                                  Ended
                                  Sept.
      30,
                                
                                
                                Nine
                                  Months
                                  Ended
                                  Sept.
      30,
                                
                                
                                Cumulative
                                  SinceInception
                                  April
      7, 2004
                                  to
      Sept. 30,2007
                                
                                
                                2006
                                
                                
                                2007
                                
                                
                                2006
                                
                                
                                2007Operating
      Activities:Accounts
      Receivable
                                
                                $
                                (18,973
                                )
                                
                                
                                (74,879
                                )
                                
                                
                                (42,256
                                )
                                
                                
                                (177,074
                                )
                                
                                
                                (75,092
                                )Prepaid
      Expenses
                                
                                
                                (7,004
                                )
                                
                                
                                7,344
                                
                                
                                
                                (30,272
                                )
                                
                                
                                33,733
                                
                                
                                
                                (78,167
                                )Accounts
      Payable
                                
                                
                                1,749
                                
                                
                                
                                (27,319
                                )
                                
                                
                                8,899
                                
                                
                                
                                (17,180
                                )
                                
                                
                                122,304Accrued
      Liabilities
                                
                                
                                8,893
                                
                                
                                
                                (198,760
                                )
                                
                                
                                (30,894
                                )
                                
                                
                                (87,604
                                )
                                
                                
                                42,210Convertible
      Debt
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (41,189
                                )
                                
                                
                                -Other
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                25,000Total
                                
                                $
                                (15,335
                                )
                                
                                
                                (293,614
                                )
                                
                                
                                (94,523
                                )
                                
                                
                                (289,314
                                )
                                
                                
                                36,255
 
 Investing
Activities:
 The
changes in investing activities non-cash working capital accounts as detailed
below pertain to capital asset additions and have been included in that caption
in the Statement of Cash Flow:
 Accounts
      Receivable
                                  
                                  $
                                  (797,192
                                  )
                                  
                                  
                                  (342,958
                                  )
                                  
                                  
                                  (579,697
                                  )
                                  
                                  
                                  (357,433
                                  )
                                  
                                  
                                  (1,232,836
                                  )Prepaid
      Expenses
                                  
                                  
                                  186,748
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  153,117
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  14,174Accounts
      Payable
                                  
                                  
                                  (167,937
                                  )
                                  
                                  
                                  (73,489
                                  )
                                  
                                  
                                  786,913
                                  
                                  
                                  
                                  52,788
                                  
                                  
                                  
                                  1,228,691Accrued
      Liabilities
                                  
                                  
                                  (365,693
                                  )
                                  
                                  
                                  106,492
                                  
                                  
                                  
                                  (184,181
                                  )
                                  
                                  
                                  62,132
                                  
                                  
                                  
                                  16,565Total
                                  
                                  $
                                  (1,144,074
                                  )
                                  
                                  
                                  (309,955
                                  )
                                  
                                  
                                  176,152
                                  
                                  
                                  
                                  (242,513
                                  )
                                  
                                  
                                  26,594
  Financing
Activities:
 The
changes in financing activities non-cash working capital accounts as detailed
below pertain to shares issued and issuable and have been included in that
caption in the Statement of Cash Flow:
 Accounts
      Receivable
                              
                              $
                              (2,121
                              )
                              
                              
                              -
                              
                              
                              
                              (2,121
                              )
                              
                              
                              -
                              
                              
                              
                              (2,121
                              )Prepaid
      Expenses
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              10,000
                              
                              
                              
                              (10,000
                              )Accounts
      Payable
                              
                              
                              11,034
                              
                              
                              
                              -
                              
                              
                              
                              (17,815
                              )
                              
                              
                              -
                              
                              
                              
                              12,257Accrued
      Liabilities
                              
                              
                              111,908
                              
                              
                              
                              -
                              
                              
                              
                              331,908
                              
                              
                              
                              -
                              
                              
                              
                              331,908Flow-through
      Share Premium
                              
                              
                              933,335
                              
                              
                              
                              -
                              
                              
                              
                              933,335
                              
                              
                              
                              -
                              
                              
                              
                              933,335Total
                              
                              $
                              1,054,156
                              
                              
                              
                              -
                              
                              
                              
                              1,245,307
                              
                              
                              
                              10,000
                              
                              
                              
                              1,265,379
 
 
 19. NEW
ACCOUNTING STANDARDS
 
 FASB
Interpretation (FIN) 48, “Accounting for Uncertainty in Income taxes – an
interpretation of FASB Statement No. 109 (FIN 48). In July 2006, the FASB issued
FIN 48, which provides guidance on accounting for income tax positions about
which the Company has concluded there is a level of uncertainty with respect to
the recognition of a tax benefit in the Company’s financial statements. FIN 48
describes the minimum recognition threshold a tax position is required to meet.
Tax positions are defined very broadly and include not only tax deductions and
credits but also decisions not to file in a particular jurisdiction, as well as
the taxability of certain transactions. The Company adopted FIN 48 effective
January 1, 2007. See note 10 for additional information.
 
 The
following new accounting standards have been issued, but have not yet been
adopted by the Company as at September 30, 2007:
 
 Statement
of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements”
(SFAS No. 157). In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 157, which defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS No 157 does not require
any new fair value measurements. However, in some cases, the application of SFAS
No. 157 may change the Company’s current practice for measuring and disclosing
fair values under other accounting pronouncements that require or permit fair
value measurements. For the Company, SFAS No. 157 will be effective as of
January 1, 2008 and must be applied prospectively except in certain cases. The
Company is currently evaluating the impact of adopting SFAS NO. 157, and cannot
currently estimate the impact of SFAS No. 157 on its consolidated results of
operations, cash flows or financial position.
 
 SFAS No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS No. 159). In February 2007, the FSAB issued SFAS No. 159, which permits
entities to choose to measure many new financial instruments and certain other
items at fair value. For the Company, SFAS No. 159 will be effective as of
January 1, 2008 and will have no impact on amounts presented for periods prior
to the effective date. The Company cannot currently estimate the impact of SFAS
No. 159 on its consolidated results of operations, cash flows or financial
position and has not yet determined whether or not it will choose to measure
items subject to SFAS No. 159 at fair value.
  18
 
 20.
SUBSEQUENT EVENTS
 
 Private Placement
Financings
 
 On
October 3, 2007, the Company closed a second portion of the brokered private
placement (“the Offering”) of common shares and flow through common shares that
closed on September 28, 2007. Pursuant to the Offering, the Company issued an
additional 335,000 flow through common shares at a purchase price of $3.00 per
share for total gross proceeds of $1,005,000 and granted a warrant to the broker
to purchase, until April 3, 2009, 26,800 common shares at a purchase price of
$3.00 per share. Share issue costs associated with this portion of the Offering
amounted to approximately $83,400.
 
 On
October 30, 2007 and November 1, 2007, the Company closed additional brokered
private placement financings aggregating 1,450,000 common shares and flow
through common shares for aggregate gross proceeds of $3,650,000. Pursuant to
those private placements, the Company issued 1,400,000 common shares at a
purchase price of $2.50 per common share for proceeds of $3,500,000 and 50,000
flow through common shares at a purchase price of $3.00 per share for proceeds
of $150,000 and granted warrants to the broker to purchase, until April 30,
2009, 80,000 common shares at a purchase price of $2.50 per share and 4,000
common shares at a purchase price of $3.00 per share and, until May 1, 2009,
32,000 common share at a purchase price of $2.50 per share. Share issue costs
associated with this private placement amounted to approximately
$299,900.
 
 ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 
 All
statements contained herein that are not historical facts, including,
but not limited to, statements regarding the Company's current business
strategy, the Company's projected sources and uses of cash, and the
Company's plans for future development and operations, are based upon
current expectations. These statements are forward-looking in nature and
involve a number of risks and uncertainties. Actual results may differ
materially. Among the factors that could cause actual results to differ
materially are the following: the availability of sufficient capital to
finance the Company's business plans on terms satisfactory to the Company;
competitive factors; changes in labor, equipment and capital costs; changes
in regulations affecting the Company's business; future acquisitions or
strategic partnerships; general business and economic conditions; and
factors described from time to time in the reports filed by the Company
with the Securities and Exchange Commission. The Company cautions readers
not to place undue reliance on any such forward-looking statements, which
statements are made pursuant to the Private Litigation Reform Act of 1995
and, as a result, are pertinent only as of the date made.
 
 Restatement
 
 In March,
2009, we determined that it was necessary to restate our unaudited financial
statements as at September 30, 2007 and December 31, 2007. The purpose of the
restatements is to correct an error in measurement and an error in the
application of US GAAP in the course of recording certain September, 2007
transactions as described in Note 2. Certain amounts and comments in this
Management’s Discussion and Analysis have been restated and/or updated to
reflect the impact of the restatement adjustments. For a full discussion of
current operations relating to our properties, please see our current Annual
Form 10-K for the Fiscal Year Ended December 31, 2008.
 
 PLAN OF
OPERATION
 
 The
Company is an exploration stage company whose primary objective is to identify,
acquire and develop working interests in underdeveloped petroleum and natural
gas prospects. We are focused on prospects located in Canada and the United
States. The Company has no oil and gas reserves or production.
 
 The
prospects we hold are generally under leases and include partial and full
working interests. In some instances, Kodiak is the operator and in others it is
obligated to perform certain seismic and exploratory well drilling for its
interests.  In some instances, additional seismic and drilling
activity will result in additional working interests or is required to maintain
the current percentage interests.  The prospects are subject to
varying royalties due to the state, province or federal governments and, in some
instances, to the seller of the prospect.
 
 The
Company plans to engage in seismic data collection and well drilling programs on
a number of prospects in which it has an interest or right to acquire percentage
interests over the next two years.  Drilling programs will be
conducted where the seismic data supports the effort and expense and further
drilling will be based on the results of initially drilled wells. A number of
the prospects are located in the vicinity of petroleum and natural gas
infrastructure, most importantly the ability to tie-in to existing or planned
pipelines.  This will be important in lowering the overall cost of
development and selling any natural resources located in a
prospect.
 
 The
Company has carried out the following activities during the year to date 2007
period and during the next twelve months, the Company plans to aggressively
pursue the development of its asset base.
  19
 
 Canada
  Northwest
Territories – Little Chicago
  The
Company is the operator of the Little Chicago prospect in the Northwest
Territories of Canada under an original farm-out agreement with the two 50%
working interest owners of a 200,000 acre exploration license (EL 413). The
prospect is located in the Mackenzie River Valley, centered along the planned
Mackenzie Valley Pipeline. Under the farm-out agreement, as of September 30,
2007, the company had spent approximately $6,800,000 to acquire 2D seismic data,
thus earning a 12.5% working interest in the prospect as of April
2007.  The Company acquired an additional 43.75% working interest on
September 28, 2007, from Thunder River Energy, Inc., in an asset transaction in
respect of the prospect and other assets of Thunder. Currently, Kodiak has a
56.25% working interest in the prospect. Kodiak has the further right to earn
additional working interests in the prospect upon drilling wells and is
negotiating additional earnings for obtaining seismic data. The completed
seismic program consisted of 84 Km high resolution data.  The company
also has obtained an engineering prospective report with respect to the
property.  There are 13 shallow drill targets defined with the
potential for shallow depth petroleum and some potential for medium depth
petroleum.  There may be gas in the area, but development of any
natural gas will be deferred until there is a pipeline in the area. The Company
is planning on completing a further seismic program by the end of the second
quarter of 2008 which is expected to cost approximately $5,500,000. After
evaluating the seismic program the Company will use the results of this and the
previous year’s program to identify 2 to 3 drilling sites. The C ompany plans to
drill those locations during the winter of 2008/2009. Due to the high costs of
the project, the Company expects to source additional partners for the drilling
programs.
  This
prospect is subject to a 1% gross over-riding royalty to Time Stratagraphic, a
12.5% Canadian federal royalty on production and annual rental payments to the
Department of Northern and Indian Affairs, Canada, and an Area of Mutual
Interest (AMI) with partners on a 12 km radius of the prospect
boundary.
  Northern
British Columbia – Lucy
  The
Company has a 7% working interest in a natural gas well in Northern British
Columbia located forty miles northeast of Fort Nelson. The prospect consists of
approximately three square miles located in the North Yoyo Otter Park shale
basin. Seismic reports covering the Lucy prospect indicate a possible lower
level reef build up equivalent in age to the nearby Mel, Yoyo and Sierra reefs.
In the vicinity of the Lucy prospect there are active gas operations. The first
well was drilled in December 2006. After some difficult drilling conditions, the
lower zones have been abandoned. The company is responsible for paying 10% of
any abandonment costs in excess of the existing costs which the company has paid
fully to date. The Company is planning to initiate an independent operator
drilling program on this property. By initiating independent operators, The
Company expects to earn a working interest of between 40 to 50
percent.   The Company anticipates the well will be drilled during
late 2007.  Testing will be initiated immediately, and based on the
testing results , the well will be tied in as soon as possible.  The
possibility of additional wells will be reviewed during the following season.
The estimated cost of this program is planned to be $1,500,000. To date, the
company has expended approximately $270,000 in connection with this
property.
  Northern
Alberta – Fort McMurray
  In
January 2007, the Company, jointly with two partners (one which has let its
interest expire), acquired two blocks of petroleum and natural gas licenses over
sixty-four sections of land near Fort McMurray in northeastern
Alberta.  The licenses are for all the petroleum and natural gas
rights from the base of the Woodbend formation to fifteen meters into the top of
the Precambrian section subject to a 2.5% gross overriding royalty reserved for
he seller in the prospects. The Company’s initial working interest is 50%. The
Company plans to initiate a seismic program on this property during the winter
of 2007/08 which is estimated to cost approximately $300,000. Based on the
results of the seismic program, a drilling program of 6 to 12 wells is expected
to follow which would cost approximately $1,500,000. The prospect requires a
payment of $28,672 in annual rentals.
  Southeastern
Alberta – Province/Granlea
  The
Company, jointly with a partner, purchased two sections, approximately 1,280
acres gross, 640 acres net, of petroleum and natural gas rights at a provincial
land sale on September 22, 2005. The Company has a 50% working interest in this
property. A 2D seismic program was completed on the property in the fourth
quarter of 2005, and a well was drilled and completed and production commenced
in September 2006. Various surface facilities were installed and a pipeline
tie-in was completed. Although the initial drilling showed good pressure and
some water, in October 2006, there was a substantial increase in water rates.
Finally, because of the water rates, the well was shut-in during July
2007.  The well bore has been evaluated and has been abandoned due to
having no present economic production potential. The company intends to sell the
surface facilities. The Company expended approximately $550,000 in connection
with this property.  The company will consider additional internal
geological reviews of the prospect to evaluate whether or not the land offers
any future drilling potential.
  20
  Southeast Alberta - Manyberries
 
 The
Company farmed into these lands which comprise nine sections (5,760 acres)
of undeveloped petroleum and natural gas rights in southeast Alberta. The
Company drilled two wells and recompleted one other well on the Manyberries
property, which earned the Company a 66 2/3% interest in the lands. After
testing multiple formations in each of the wells, no economic production
potential could be attributed. Due to the high cost of development and the
associated risk, the Company will release the nine sections back to the Crown
and abandon the wells in the fourth quarter of 2007
  United
States
  New
Mexico
  On
September 28, 2007, The Company acquired a 100% interest in 55,000 acres of
prospects located in northeastern New Mexico from CIMA Holdings Inc., a
subsidiary of Thunder River Energy, Inc. The company believes that natural gas
and commercial volumes of CO2 have been found in existing wells in the area. The
company also believes that there is the potential for oil and helium
mineralization at shallow depths. The prospects are subject to a 5.5% gross
over-riding royalty on production to five individuals, state royalties on state
lands at 12.5% of production and federal royalties on federal lands at 12.5% of
production.
  The
Company, through its subsidiary, Kodiak Petroleum (Montana), Inc. is planning a
seismic program on this property by end of the fourth quarter of 2007, followed
up by a 3 to 6 well drilling program based on the seismic results. The Company
also intends to acquire additional mineral rights adjacent to the property. The
seismic work is expected to cost approximately $1,000,000 and the drilling
program approximately $1,500,000. Whether or not the company will pursue
production will be immediately evaluated after completion of the seismic and
drilling programs, and if the results are favorable, the company will initiate
plans and seek additional financing to take this project to the development
stage.
  Montana
  Under a
joint venture agreement, the Company acquired seismic data and a right to drill
a 2 to 3 well drilling program for a 50% working interest in the wells and the
right to participate on a 50% working interest basis going forward. The Company
must participate at the 50% capital requirement to continue to earn 50% in
additional lands. Two wells were drilled in the third quarter of 2006, one of
which is cased for subsequent evaluation of the multiple zones found in the
prospect and one of which was abandoned. A third well is licensed and will be
drilled depending on the results of testing on the first well. To date, the
Company has expended approximately $540,000 in connection with this prospect.
The prospect is subject to a 12.5% petroleum and gas royalty on 100% of
production.
  Financial
Condition and Changes in Financial Condition
 
 The
Company had no income during the evaluation period for the nine month periods
ended September 30, 2007 and 2006, except for $225 in 2007 resulting from a
4th
Quarter 2006 revenue under-accrual.
 
 Net Loss
for the nine months ended September 30, 2007 totaled $1,787,039 (2006 -
$1,484,574). Those losses include general and administrative costs
comprising expenses relating to personnel consulting, office, investor
relations, public company expenses, audit legal and accounting fees and other
general and administrative costs. In addition the 2007 loss includes stock-based
compensation expense, interest expense and deferred income tax expense.
Depletion, depreciation and accretion for the periods includes depreciation of
furniture and fixtures and accretion of asset retirement obligations. In
addition, 2006 depletion, depreciation and accretion includes a ceiling test
write-down as a result of impairment in the Company’s Canadian geographical cost
center.
  21
 
 Liquidity and Capital Resources:
 
 From
inception to September 30, 2007, the Company has financed its operations
primarily from the sale of securities and loans from shareholders. During
the second and third quarters of 2007, the Company obtained $3,300,000 in
unsecured 91⁄2% notes payable from a European lender. On September 28, 2007, the
lender was repaid $2,567,500 in 1,027,000 common shares issued as part of the
financing described in Note 10 to the Consolidated Financial Statements. On
October 1, 2007, the balance was repaid in full in cash with accrued interest.
The September, October and November 2007 brokered private placement financings
of $17,145,010 gross proceeds ($15,645,000 net of share issue costs) will
provide sufficient funds to allow the Company to carry on operations into mid
2008. Additional financing may then be required.
 
 As of
September 30, 2007, our assets totaled $34,989,585, at cost (December 31,
2006 - $2,707,075) which consisted of cash and other current assets of
$8,797,429 (2006 - $1,331,159); oil and gas properties and equipment of
$26,075,336 (2006 - $1,326,056) and other assets of $116,820 (2006 - $49,860).
Our total current liabilities were $3,438,586 (December 31, 2006 - $859,103)
and consisted of accounts payable and accrued liabilities aggregating
$1,772,751 relating to capital activities and general and administrative costs
incurred during the nine months ended September 30, 2007, notes payable of
$732,500 and $933,355 premium liability relating to Canadian flow-through shares
issued. We had asset retirement obligations of $108,811 (December 31, 2006 -
$90,911), deferred income taxes of $55,480 (December 31, 2006 - $Nil) and
shareholders' equity of $31,442,188 (December 31, 2006 -
$1,757,061).
 
 During
the nine months ended September 30, 2007, the company raised $28,628,130, net of
share issue costs, in private placement financing proceeds. These financings
together with the proceeds of the notes payable have enabled the Company to
finance its on-going capital expenditures and general and administrative
expenses. Additional financing will be required to enable the Company to carry
out the balance of its planned activities for 2008.
 
 RAISING
CAPITAL
 
 The
Company currently has the capital resources to fully implement and
carry out its 2007 business plan and a substantial portion of its 2008 plan
as described herein. However, we expect to raise additional capital,
either through debt, equity or a combination thereof to finance the balance
of our 2008 program. In the event that additional capital is raised at some
time in the future, existing shareholders will experience dilution of their
interest in the Company.
  ITEM 3.
CONTROLS AND PROCEDURES
  2005
Restatement
 
 During
the process of preparing the Company’s Quarterly Report on Form 10-QSB for the
Fiscal Quarter Ended September 30, 2006, the Company’s CFO, at that time,
identified errors in the accounting records that originated in the fourth
quarter of 2005, the first quarter ended March 31, 2006 and the second quarter
ended June 30, 2006. The errors arose as a result of a lack of adequate
procedures and documentation necessary to ensure that records were maintained in
reasonable detail to fairly reflect the transactions of the Company in the start
up phase of operations.
  After
discussing these matters with management, the CFO, at that time, recommended to
the Audit Committee that previously reported financial results be restated to
reflect correction of these errors. The Audit Committee agreed with this
recommendation. Pursuant to the recommendation of the Audit Committee, the Board
of Directors determined at its meeting on November 3, 2006, that previously
reported results for the Company be restated. On December 14, 2006, amended
consolidated financial statements for the above noted periods were
filed.
  Evaluation
of Disclosure Controls and Procedures
 
 During
the third quarter of 2006, the CFO, at that time, evaluated the disclosure
controls and procedures and identified a lack of sufficient procedures,
documentation and qualified personnel to ensure the records fairly reflected the
transactions of the Company resulting in a material weakness in the Company’s
internal control over financial reporting. Solely as a result of the material
weakness, management concluded that the disclosure controls and procedures were
not effective as of December 31, 2005, March 31, 2006 or June 30,
2006.
 
 Remediation
of 2005 and 2006 Material Weakness in Internal Control
 
 During
December, 2006 and the first half of 2007, the company hired a Controller, a new
CFO and a Vice-President Operations and additional qualified personnel. The new
staff and existing management have implemented new procedures and controls for
many areas of the Company’s activities. During 2007, the Company initiated a
review of its corporate policies and procedures with the assistance of an
outside consulting firm, with a goal of having the Company become fully SOX
compliant by year end 2007. Additional policies and procedures have been
implemented and others strengthened. Testing of such policies and procedures was
completed in late 2007 and early 2008.
 
 Under the
direction of the Chief Executive Officer and Chief Financial Officer, we have
evaluated our disclosure controls and procedures as currently in effect,
including the remedial actions discussed above, and we have concluded that, as
of this date, our disclosure controls and procedures are effective.
  2007
Restatement
 
 During
the process of preparing the Company’s Annual Report on Form 10-K for the Fiscal
Year Ended December 31, 2008, it was determined that it may be necessary to
restate our consolidated financial statements for the Fiscal Quarter Ended
September 30, 2007 and the Fiscal Year Ended December 31, 2007. The restatements
would be required to correct for an error in measurement and an error in the
application of U.S. generally accepted accounting principles (“US GAAP”) in
recording two September, 2007 transactions as described in Note 2 to our
unaudited consolidated financial statements.
  After
discussing these matters with other management, the CFO recommended to the Audit
Committee that previously reported financial results be restated to reflect
correction of these errors. The Audit Committee agreed with this recommendation.
Pursuant to the recommendation of the Audit Committee, the Board of Directors
determined at its meeting on March 13, 2009, that previously reported results
for the Company be restated. On March 27, 2009, amended consolidated financial
statements for the above noted periods were filed.
 
 Both of
these errors resulted from the Company not seeking appropriate external advice
regarding the accounting of certain transactions that were complex and not
subject to routine accounting principles. One error was in measuring the
appropriate date at which common shares of the Company were issued in
consideration for the acquisition of unproved oil and gas properties, an arm’s
length transaction that was negotiated over a period of several months during
2007 but not finally closed until September 28, 2007, at which date the common
shares were issued. The second error was in the application of US GAAP in the
accounting for the complexities involved relating to premium proceeds received
on the issue of Canadian flow-through shares, a Canadian income tax concept not
in practice in the United States. These errors demonstrated a material weakness
relating to the segregation of duties among financial and accounting personnel
and a need to engage additional personnel or seek outside advice where
appropriate to strengthen internal control over financial
reporting.
 Remediation
of Weakness in Internal Control Over Financial Reporting
 
 In
addition to the strengthening of internal control over disclosure controls and
procedures discussed above, the Company will endeavor to
engage outside consulting assistance to ensure the proper accounting for
non-routine accounting transactions and compliance with US GAAP. Beginning in
2008, the Company engaged an outside consulting firm to assist in income tax
planning and compliance and beginning with our fiscal year ended December 31,
2008, to review our Canadian and U.S. income tax provisions.
  Evaluation
of Internal Control over Financial Reporting
 
 As at
September 30, 2007 and December 31, 2007, management believes the Company’s
Internal Control over Financial Reporting does not meet the definition of
adequate control, based on criteria established by Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Management identified a material weakness relating to the
segregation of duties among certain personnel who had incompatible
responsibilities within all significant processes affecting financial reporting.
We also had a material weakness resulting from our failure to implement adequate
controls to restrict access to financially significant systems or to monitor
access to those systems, which resulted in conflicting access and/or
inappropriate segregation of duties. As a result of these material weaknesses,
management has concluded that the Internal Controls over Financial Reporting
were not effective as at September 30, 2007 and December 31,
2007.
 As at
December 31, 2008, the Company continues to have a material weakness in internal
control over financial reporting, relating to the segregation of duties among
certain personnel. Management believes that without engaging additional
personnel, estimated to cost a minimum of approximately $150,000 per annum, we
cannot remedy such material weakness. Management believes such expenditures
cannot be justified at this time when the Company is still in the exploratory
stage of operations and has no proved reserves, production or cash flow. When
sufficient cash flow is being generated, management will review its position.
Management believes its controls and procedures related to its financial and
corporate information systems are appropriate for a company of its size and
mandate and due to its internal expertise, it is not dependent upon the inherent
risks in external third party management of such systems.
  22
 
 PART II -
OTHER INFORMATION
 
  ITEM 1.
LEGAL PROCEEDINGS
 
 None.
 
  ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 On
February 20, 2007, pursuant to subscription agreements, the Company closed a
private
 placement
with an investor for 420,000 units at a $1.25 price per unit for gross
proceeds of $525,000. Each unit entitled the subscriber to one common share of
the Company and one common share purchase warrant. Each warrant entitles the
warrant holder to exchange one warrant for one common share of the Company at a
price of $1.50 until February 20, 2009. The Common shares were issued
pursuant to Regulation S ("Regulation S") under the Securities Act of 1933,
as amended (the "1933 Act").
 
 On May
10, 2007, pursuant to subscription agreements, the Company closed private
placement financings with investors for 2,447,900 units at a price of $1.25 per
unit for gross proceeds of $3,059,875. Each unit entitled the subscriber to one
common share of the Company and one warrant. Each warrant entitles the warrant
holder to exchange one warrant for one common share at a price at a price of
$1.50 until May 10, 2009.
 
 On September 28, 2007, pursuant to
subscription agreements, the Company closed brokered private placement
financings with investors for 2,756,000 common shares at a price of $2.50 per
share and 1,866,670 flow through common shares at a price of $3.00 per share for
gross proceeds of $6,887,244 and $5,598,143 respectively. In connection with
these offerings, the broker was granted warrants to purchase, until March 28,
2009, 220,480 common shares at a per share price of $2.50 and 149,334 common
shares at a per share price of $3.00,
 
  ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
 None.
 
 
 Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 None.
 
 
 Item 5.
OTHER INFORMATION
 
 None.
  23
 
 ITEM 6. EXHIBITS
 
 EXHIBITS
  31.1 -
                        Certification
      of Chief Executive Officer Pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200231.2 -
                        Certification
      of Chief Financial Officer to Section 302 of the Sarbanes-Oxley Act of
      200232   
      -
                        Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002
 
 
 
 SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
 
 
 KODIAK
      ENERGY, INC.(Registrant)Dated:
      March 27, 2009
                  By:
                  /s/  William S.
      TigheWilliam
      S. TigheChairman,
      CEO, COO and President
 
  24